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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 RUTHERFORD ROAD
CARLSBAD, CA 92008-8815
(760) 931-1771
(Address, including zip code, and telephone number, including area code of
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Preferred Share Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 8, 1999, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $816,632,022 based on the
closing sales price of the Registrant's Common Stock as reported in the
consolidated transactions reporting system.
As of March 8, 1999, the number of shares of the Registrant's Common Stock
outstanding was 75,526,661, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II and IV incorporate certain information by reference from the
Registrant's Annual Report to shareholders for the fiscal year ended December
31, 1998.
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on May 5, 1999, which proxy statement was filed on April 1, 1999.
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Note: 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, 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.
PART I
ITEM 1. BUSINESS.
Callaway Golf Company (the "Company" or "Callaway Golf") is a California
corporation formed in 1982 and has the following directly wholly-owned operating
subsidiaries: Callaway Golf Sales Company, Callaway Golf Ball Company, CGV,
Inc., Callaway Golf Europe Ltd. (formerly Callaway Golf (UK) Limited), ERC
International Company, Callaway Golf Korea, Ltd., Callaway Golf (Germany) GmbH,
Callaway Golf Canada Ltd. and Callaway Golf Europe, S.A. (France). The Company
designs, develops, manufactures and markets high quality, innovative golf clubs.
The Company's golf clubs are sold at premium prices to both average and skilled
golfers on the basis of performance, ease of use and appearance. Callaway Golf's
primary products, most of which incorporate the Company's S2H2(R) design
concept, currently include Big Bertha(R) Steelhead(TM) Stainless Steel Drivers
and Fairway Woods, Great Big Bertha(R) Hawk Eye(R) Drivers and Fairway Woods,
Biggest Big Bertha(R) Titanium Drivers, Great Big Bertha(R) Tungsten
Titanium(TM) Irons, Big Bertha(R) X-12(TM) Irons, and various putters, including
the Bobby Jones(R) Series Putters and the Carlsbad Series Putters. The Company
also manufactures and markets the Odyssey(R) brand line of putters and wedges
with Stronomic(R) and Lyconite(TM) face inserts. The Company currently is
constructing a golf ball manufacturing plant for its wholly-owned subsidiary,
Callaway Golf Ball Company, and anticipates manufacturing and marketing golf
balls by late 1999 or early 2000. See "Item 1. Business-Product Design and
Development-Golf Ball Development."
SEGMENTS
Information regarding the Company's segments is contained in Note 14
of the Consolidated Financial Statements in the Company's Annual Report to
Shareholders for the year ended December 31, 1998 ("1998 Annual Report to
Shareholders"), which is incorporated herein by reference.
RESTRUCTURING
On November 11, 1998, the Company announced that it had adopted a business
plan that included 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 Golf"), 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 largely completed during 1999. As a result of
these actions, the Company recorded one-time charges of $54.2 million during the
fourth quarter of 1998. These charges (shown below in tabular format) primarily
relate 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 the Company's 80%
interest in Callaway Golf Media Ventures
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(see Note 15 of the Consolidated Financial Statements in the 1998 Annual Report
to Shareholders), a loss on the sale of All-American Golf (See Note 13 of the
Consolidated Financial Statements in the 1998 Annual Report to Shareholders), 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. Without these charges, the Company's earnings per
diluted share would have been $0.13 for the year ended December 31, 1998.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31, 1998,
the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions will occur in the first quarter of 1999.
Details of the one-time charges are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve
One-Time Balance
Cash/Non-Cash Charge Activity at 12/31/98
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<S> <C> <C> <C> <C>
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191
Severance packages Cash 11,603 8,412 3,191
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731
Excess lease costs Cash 12,660 146 12,514
Contract cancellation fees Cash 2,700 1,504 1,196
Other Cash 356 24 332
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937
Loss on disposition/impairment of assets Non-cash 12,364 2,730 9,634
Excess lease costs Cash 806 4 802
Other Cash 613 112 501
</TABLE>
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013. The
Company anticipates that this business plan will generate savings going forward
in excess of $40.0 million per year, beginning in 1999. In addition, the Company
is continuing to implement an ongoing process of reviewing its manufacturing
operations and its worldwide supplier network aimed at reducing the cost of
goods sold and generating significant savings. However, no assurances can be
given that the full amount of the anticipated savings will be realized.
PRODUCTS
The following table sets forth the contribution to net sales attributable
to the product groups for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
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1998 1997 1996
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<S> <C> <C> <C> <C> <C> <C>
Metal Woods $389,900 56% $544,258 64% $479,127 71%
Irons 229,112 33% 233,977 28% 168,576 25%
Putters, accessories
and other* 78,609 11% 64,692 8% 30,809 4%
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Net Sales $697,621 100% $842,927 100% $678,512 100%
=================================================================================
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* 1998 and 1997 net sales include $49.2 and $20.5 million, respectively, of
Odyssey(R) putters and wedges.
The Company believes that, although interest in golf appears to be growing,
the worldwide premium golf equipment market has been declining and that it may
continue to decline during the foreseeable future. Demand in the
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United States for premium golf equipment also has declined in 1998, and the
Company experienced a decline in domestic sales in 1998. The economic turmoil in
Southeast Asia and Japan continues to cause contraction in the retail golf
markets in these countries and elsewhere around the world, and has had an
adverse effect on the Company's sales and results of operations. The Company
expects this situation to continue in 1999.
While sales of the Company's newly introduced Big Bertha(R) Steelhead(TM)
and Great Big Bertha(R) Hawk Eye(R) Titanium Metal Woods 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.
METAL WOODS
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Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
In January 1999, the Company introduced and began delivery of significant
quantities of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods were
designed to replace the Company's Great Big Bertha(R) Titanium Drivers and
Fairway Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods incorporate a design with a totally new oversize clubhead incorporating a
thin titanium crownplate together with a strong, lightweight titanium body.
This design includes a new Tungsten Gravity Screw that is inserted into the sole
of the clubhead and produces a low and deep center of gravity. The Company
offers Great Big Bertha(R) Hawk Eye(R) Titanium Drivers in lofts ranging from 6
to 12 degrees. Great Big Bertha(R) Hawk Eye(R) Titanium Fairway Woods are
available in a 2-wood (The Deuce), Strong 3-wood, 3-wood, Strong 4-wood, 4-wood,
5-wood, 7-wood (Heaven Wood), and 9-wood (Divine Nine).
Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
In August 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway
Woods. Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
were designed to replace the Company's Big Bertha(R) Stainless Steel Drivers and
Fairway Woods with the War Bird(R) soleplate. Big Bertha(R) Steelhead(TM)
Stainless Steel Drivers and Fairway Woods have a large forgiving face and a
lightweight crownplate atop a heavier, stronger body that incorporates a
relatively heavy weight chip. This design produces a low center of gravity. The
Company offers Big Bertha(R) Steelhead(TM) Stainless Steel Drivers in lofts
ranging from 6 to 12 degrees. Big Bertha(R) Steelhead(TM) Stainless Steel
Fairway Woods are available in a 2-wood (The Deuce), Strong 3-wood, 3-wood,
Strong 4-wood, 4-wood, 5-wood, 7-wood (Heaven Wood), and 9-wood (Divine Nine),
11-wood (Ely Would).
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Biggest Big Bertha(R) Titanium Driver
In January 1997, the Company introduced Biggest Big Bertha(R) Titanium
Drivers. Biggest Big Bertha(R) Drivers have the largest titanium clubheads of
any of the Company's clubs to date, and provide maximum forgiveness, and
incorporate ultralight graphite shafts which are longer than Great Big
Bertha(R) Driver shafts. Although larger and longer, Biggest Big Bertha(R)
Drivers are lighter in overall weight than Great Big Bertha(R) Drivers. Biggest
Big Bertha(R) Drivers incorporate the S2H2(R) design concept, the War Bird(R)
soleplate (which features a deep dish on either side of the central facet
running rearward from the clubface) and an advanced internal weighting system
which increases the degree of perimeter weighting of the titanium clubhead. The
Company offers Biggest Big Bertha(R) Drivers in lofts ranging from 6 to 12
degrees.
IRONS
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Big Bertha(R) X-12(TM) Irons
In January 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) X-12(TM) Irons. Big Bertha(R) X-12(TM) Irons
incorporate a low center of gravity which helps get the ball airborne more
easily with the proper trajectory and spin. The varied 360-degree undercut
channel creates a thinner profile, and together with a new shape and a narrower
sole, keeps the center of gravity low. The unique multi-layer design in the
cavity allows for increased forgiveness on off-center hits. These irons are
offered in 1 through 9, and pitching, approach, sand, and lob wedges, with
either graphite or steel shafts.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons
In January 1997, the Company introduced Great Big Bertha(R)
Tungsten.Titanium(TM) Irons. Great Big Bertha(R) Tungsten.Titanium(TM) Irons
incorporate the same core design features as Big Bertha(R) Irons, but have a
slightly larger titanium clubhead with a specially designed tungsten inset to
concentrate weight low and deep in the clubhead. These design features are
intended to give these irons a lower and deeper sweet-spot compared to other
titanium irons. The Company offers Great Big Bertha(R) Tungsten.Titanium(TM)
Irons 1 through 9, and pitching, approach, sand and lob wedges, with either
graphite or steel shafts.
PUTTERS
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The Company has two lines of putters. Odyssey(R) brand putters sold by the
Company incorporate a soft, sensitive black trapezoidal Stronomic(R) insert
designed to provide better feel and forgiveness. This line includes the new
TriForce(TM) series of putters introduced in 1999, Rossie(TM) mallet putters and
Dual Force(R) blade style putters. The center of gravity in the TriForce(TM)
series of putters has been moved back and away from the face, which creates
better ball roll than similar-shaped clubs. This weight distribution is
achieved through having the largest Stronomic(R) insert of any Odyssey(R) putter
to date, coupled with a heavy, milled tungsten flange. The Company also has a
Callaway(R) line of steel and graphite shafted putters, including the new
Carlsbad Series putters. Some of these putters incorporate the S2H2(R) concept,
including the Tuttle(R) and the Tuttle(R) II putters. In 1996, the Company
introduced and commenced deliveries of the new Bobby Jones(R) line of putters,
consisting of three styles of precision-machined putters with a double-radius
bend, offset shaft. In 1997, 1998 and 1999 additional styles of the Bobby
Jones(R) putters were introduced.
ACCESSORIES
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In addition to its golf clubs, Callaway Golf offers golf-related equipment
and supplies manufactured by other companies bearing the Callaway(R) logo,
including golf bags, travel bags, head covers, hats, umbrellas and other
accessories.
PRODUCT DESIGN AND DEVELOPMENT
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. The Company's research and development
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expenses, which for 1998 and 1997 include those of Callaway Golf Ball Company
and Odyssey Golf's putter operations, were $36.8 million, $30.3 million and
$16.2 million during 1998, 1997, and 1996, respectively. The Company intends to
continue to invest substantial amounts in its research and development
activities in 1999 and beyond. In addition to development of new golf club
equipment, these investments will continue to include, among others, significant
expenditures in support of Callaway Golf Ball Company's efforts to develop and
market a new golf ball product.
Callaway Golf has the ability to create and modify golf club designs by
using computer aided design software ("CAD"), computer aided manufacturing
software ("CAM") and computer numerical control ("CNC") milling equipment. CAD
software enables designers to develop computer models of new clubhead and shaft
designs. CAM software is then used by engineers to translate the digital output
from CAD computer models so that physical prototypes can be produced. Through
the use of this technology, Callaway Golf has been able to greatly accelerate
the design, development and testing of new golf clubs.
The Company owns two induction furnaces (for casting ferrous and non-
ferrous alloys) and one cold-walled furnace (for casting titanium, nickel and
cobalt alloys) which are located in a foundry facility at the Company's
headquarters in Carlsbad, California. During 1998, the Company used its foundry
facility to cast its own prototype clubheads. In addition, the Company designs
and fabricates shaft prototypes at its technology center that also is located at
the Company's headquarters.
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.
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 equipment. Thus, although the Company has
achieved certain successes in the introduction of its golf clubs in the past, no
assurances can be given that the Company will be able to continue to design and
manufacture golf clubs that achieve market acceptance in the future.
The rapid introduction of new products by the Company can result in
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. Historically, the Company has managed such closeouts so as to
avoid any material negative impact on the Company's operations, but there can be
no assurance that the Company will always be able to do so.
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
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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.
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 product 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. There can be no assurance as to if and when a successful
golf ball product will be developed or that the Company's investments will
ultimately be realized.
The Company's golf ball business is still in the developmental stage and,
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 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.
SALES AND MARKETING
Sales for Distribution in the United States
Approximately 62%, 65% and 68% of the Company's net sales were derived from
sales for distribution within the United States in 1998, 1997 and 1996,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1998, 1997, and 1996. The Company
distributes its products in Hawaii through an exclusive distributor.
The Company, through its subsidiary Callaway Golf Sales Company, currently
employs full-time regional field representatives, in-house telephone
salespersons and customer service representatives in connection with golf club
and accessory sales. Each geographic region is covered by both a field
representative and a telephone salesperson who work together to initiate and
maintain relationships with customers through frequent telephone calls and in-
person visits. The Company believes that this tandem approach of utilizing
field representatives and telephone salespersons provides the Company a
competitive advantage over other golf club manufacturers that distribute their
golf clubs solely through independent sales representatives rather than
employees. Notwithstanding the foregoing, Callaway Golf recognizes that other
companies have marketing programs which may be equally or more effective than
its own strategy.
Some quantities of the Company's products find their way to unapproved
outlets or distribution channels. This "gray market" in the Company's products
can undermine authorized retailers and 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 domestic and international markets, it has
not stopped such commerce.
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Sales for Distribution Outside of the United States
Approximately 38%, 35% and 32% of the Company's net sales were derived from
sales for distribution outside of the United States in 1998, 1997 and 1996,
respectively. In 1997 and 1996, the majority of the Company's international
sales were made through distributors specializing in the sale and promotion of
golf clubs in specific countries or regions around the world. In 1998, the
majority of the Company's international sales were made through its foreign
subsidiaries. The Company currently has distribution arrangements covering sales
of the Company's products in over 50 foreign countries, including Japan,
Singapore, Spain, Italy, Hong Kong, Australia, Argentina and South Africa.
Prices of golf clubs for sales outside of the United States receive an export
pricing discount to compensate international distributors for selling,
advertising and distribution costs. A change in the Company's relationship with
significant distributors could negatively impact the volume of the Company's
international sales.
Prior to April 1998, the Company distributed its products in Canada through
a distributor. In April 1998, the Company purchased the distribution rights of
its Canadian distributor and began directly marketing its products in that
country through its subsidiary, Callaway Golf Canada Ltd.
In 1998, the Company directly marketed its products in the United Kingdom,
Belgium, Finland, Denmark and Sweden through its wholly-owned British
subsidiary, Callaway Golf Europe Ltd. ("CG Europe") (formerly Callaway Golf (UK)
Limited). Through two transactions in 1996 and 1998, the Company acquired the
distributor rights of its German distributor, which consist of selling and
promoting the Company's products in Germany, Austria, the Netherlands and
Switzerland. In December 1998, the Company acquired the distribution rights of
its Norwegian distributor and in January 1999 began directly marketing its
products in Norway through CG Europe. In February 1999, the Company acquired
the distribution rights of its Irish distributor and began directly marketing
its products in Ireland through CG Europe. In June 1998, the Company purchased
the distribution rights of its French distributor and began directly marketing
its products in that country through its wholly-owned subsidiary, Callaway Golf
Europe S.A.
Prior to February 1998, the Company distributed its products in Korea
through a distributor. In February 1998, the Company purchased the distribution
rights of its Korean distributor and began directly marketing its products in
that country through its subsidiary, Callaway Golf Korea, Ltd.
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(R) golf clubs in Japan. This distributor agreement
runs through December 31, 1999. The Company does not intend to extend this
agreement. Sales to Sumitomo represented approximately $58.2 million (8%), $83.0
million (10%) and $58.2 million (9%) of the Company's net sales in 1998, 1997
and 1996, respectively. See Note 14 of Notes to Consolidated Financial
Statements in the 1998 Annual Report to Shareholders.
The Company has established ERC International Company, a wholly-owned
Japanese corporation ("ERC"), 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 in Japan through ERC, and it is possible that doing
so will have a material adverse effect on the Company's operations and financial
performance.
The Company's management believes that controlling the distribution of its
products in selected major markets will be an element in the future growth and
success of the Company. As described above, 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
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 resources which may temporarily detract from attention to the day-to-
day business of the Company.
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. International reorganization also
could result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the
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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.
As noted above, the Company continues to experience unauthorized
distribution of its products in international markets. For a discussion of the
Company's efforts in this area, see "Sales for Distribution in the United
States" set forth above.
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. The Company believes it has adequate reserves for potential credit
losses. 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 1998 the Company increased its reserve for credit losses.
Management does not foresee any significant improvement in the golf equipment
market during 1999, and therefore expects this trend to continue. Accordingly,
there can be no assurance that the Company's results of operations or cash flows
will not be adversely impacted by the failure of its customers to meet their
obligations to the Company.
Advertising and Promotion
Within the United States, the Company has focused its advertising efforts
mainly on a combination of television commercials and printed advertisements in
national magazines, such as Golf Digest, Golf Magazine, Golf Week, Golf World
----------- ------------- --------- ----------
and Sports Illustrated's Golf Edition, and in trade publications, such as Golf
--------------------------------- ----
Shop Operations. Advertising of the Company's golf clubs outside of the United
- ---------------
States is typically handled by our subsidiaries and independent distributors
of the products in a particular country.
The Company also establishes relationships with professional golfers in
order to evaluate and promote Callaway Golf 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, the PGA
European Tour and the Nike Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's products
despite contractual commitments. To date, the Company believes that the
cessation of use by professional endorsers of Callaway(R) brand products has not
resulted in a significant amount of negative publicity. However, 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. The Company has created
cash "pools" that reward such usage. For the last several years, the Company has
experienced an exceptional level of driver penetration on the world's five major
professional tours, and the Company has heavily advertised that fact. It is
unlikely that the Company will be able to sustain this level of professional
usage in 1999. 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 in past years, during 1998, the Company continued its Big Bertha(R)
Players' Pools ("Pools") for the PGA, Senior PGA, LPGA and Nike Tours. Those
professional players participating in the Pools received cash for using Callaway
Golf products in professional tournaments, but were not bound to use the
products or grant any endorsement to the Company. The Company believes that its
professional endorsements and its Pools contributed to its usage on the
professional tours in 1998. However, in connection with its new business plan
for 1999 the Company has significantly reduced these Pools for the PGA and the
Senior PGA Tours, and has eliminated the Pools for the LPGA and Nike Tours. As a
result, the Company anticipates that the level of professional usage of the
Company's products will be lower in 1999 than 1998. Further, while it is not
clear whether professional endorsements materially contribute to retail sales,
it is possible that a decline in the level of professional usage of the
Company's products could have a material adverse effect on the Company's
business.
To support the promotion of its products at the retail level, the Company
offers various promotional programs to its customers. Golf clubs may be
purchased at a discount for demonstration, loan and rental use and for personal
use by golf shop professionals.
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<PAGE>
The Company's advertising, promotional and endorsement related expenses,
including compensation to professional golfers, were approximately $79.1
million, $62.4 million and $45.0 million, in 1998, 1997 and 1996, respectively.
MANUFACTURING AND SOURCES AND AVAILABILITY OF MATERIALS
The manufacturing of the Company's golf clubs involves a number of
specialized processes required by the unique design of the products. The
Company's metal woods and irons are produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using clubheads, shafts and
grips supplied by independent vendors.
The Company works with a few select casting houses to produce its
clubheads. The clubheads used in the production of Great Big Bertha(R) Hawk
Eye(R) Titanium Drivers and Fairway Woods are manufactured to Callaway Golf's
specifications by Cast Alloys, Inc. ("Alloys"), Coastcast Corporation
("Coastcast") and Sturm, Ruger and Company ("Sturm Ruger"). Coastcast and Alloys
cast Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
clubheads. Biggest Big Bertha(R) Titanium Driver clubheads are provided by
Alloys, Coastcast and Sturm Ruger. Big Bertha(R) X-12 Iron clubheads are
provided by Hitchiner Manufacturing Co. and Coastcast. Great Big Bertha(R)
Tungsten.Titanium(TM) Irons are provided by Coastcast. The Company works closely
with its casting houses, which enables the Company to monitor the quality and
reliability of clubhead production. All of these casting houses are currently
manufacturing, or are entitled to manufacture, clubheads for competitors of the
Company. The Company also works closely with Aldila, FM Precision, Fujikura,
Graphite Design, Inc., HST, Suntech-Sunwoo Co, Ltd., True Temper and Unifiber,
its principal suppliers of shafts, to develop specialized shafts suited to the
S2H2(R) design and the other unique features of the Company's products.
The Company is dependent on a limited number of suppliers for its clubheads
and shafts. In addition, some of the Company's products require specifically
developed manufacturing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. 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 domestic 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.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
Handling of Materials
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. As a standard procedure, a comprehensive audit of the treatment,
storage, and disposal facility with which the Company contracts for the disposal
of hazardous waste is performed annually by the Company. To date, the Company
has not experienced any material environmental compliance problems, although
there can be no assurance that such problems will not arise in the future.
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PRODUCT WARRANTIES
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 closely the level and nature of any product
breakage and, where appropriate, seeks to incorporate design and production
changes to assure its customers of the highest quality available in the market.
Significant increases in the incidence of breakage or other product problems may
adversely affect the Company's sales and image with golfers. At December 31,
1998, 1997 and 1996, the Company's reserves for warranty claims were
approximately $35.8 million, $28.1 million, and $27.3 million, respectively.
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.
INTELLECTUAL PROPERTY
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents and trademark registrations, the maintenance of trade secrets,
the development of trade dress, and, when necessary and appropriate, litigation
against those who are, in the Company's opinion, unfairly competing. In the
United States, the Company has applied for or been granted patents for certain
features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway(R), Big Bertha(R), Great Big Bertha(R), Hawk Eye(R),
S2H2(R), Odyssey(R), Stronomic(R) and several other product names. There is no
assurance that during the life of a patent or a trademark, prior to a court of
competent jurisdiction validating them, any of these patents or trademarks are
enforceable, although the Company believes them to be enforceable.
The 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. (See also Item 3, "Legal Proceedings.") 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 must avoid infringing these patents or other intellectual property rights, or
it must obtain licenses to use them lawfully. 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 or to defend legal actions. Despite its
efforts to avoid such infringements, there can be no assurance that Callaway
Golf Ball Company will not infringe on the patents or other intellectual
property rights of third parties in its development efforts, or that it will be
able to obtain licenses to use any such rights, if necessary.
11
<PAGE>
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.
LICENSING
Through a licensing arrangement with Jonesheirs, Inc., Callaway
Golf obtained the exclusive, worldwide rights to the use of the Bobby Jones(R)
name for golf clubs and golf-related accessories through 2010. The Company
receives a royalty from the Hickey-Freeman Company on sales of Bobby Jones(R)
Sportswear and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel in the
U.S. at its own expense under the "Callaway Golf Apparel by Nordstrom" label.
The licensing agreement runs through 2004 with automatic one-year extensions
unless terminated by either party. The line includes men's and women's golf
apparel, golf footwear and certain other products and is sold at Nordstrom
stores throughout the United States.
In 1997, Callaway Golf and Bausch & Lomb Incorporated signed a multi-year
agreement to jointly develop and globally market an exclusive line of premium
sunglasses specifically for golf enthusiasts. The sunglasses and sunglass
cases, co-branded with the Ray-Ban(R), Callaway Golf(R) and Callaway(R) marks,
were introduced in 1999 and are available through golf pro shops and other
retailers of premium golf equipment, better sporting goods and better department
stores, sunglass specialty shops and optical channels.
SEASONALITY
In the golf equipment industry, sales to retailers are generally seasonal
due to lower demand in the retail market in the cold weather months covered by
the fourth and first quarters. The Company's business generally follows this
seasonal trend and the Company expects this to continue. Unusual 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. With
respect to metal woods, the Company's major domestic competitors are Taylor
Made, Titleist, Cobra and Ping. In 1998, Orlimar and Adams emerged as new
competitors. With respect to irons, the Company's major domestic competitors
are Titleist, Cobra, Taylor Made and Ping. For putters, the Company's major
domestic competitors are Ping and Titleist. New product introductions and/or
price reductions by competitors continue to generate increased market
competition and the Company believes that such competition has caused it to lose
some unit market share and has negatively affected sales. 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 also 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. For example, consumer support for shallow-faced metal woods
increased in 1998, and many of the Company's competitors are making such
products. The Company does not currently make a "shallow-faced" wood, and does
not believe that the designs currently in the market are superior to its deeper-
faced offerings. However, if "shallow-faced" products continue to gain consumer
acceptance, the Company's sales could continue to be negatively affected.
As noted elsewhere in this Report, the Company has formed Callaway Golf
Ball Company for the purpose of creating, developing and manufacturing golf
balls. The golf ball business is highly competitive with a number of well-
established and well-financed competitors, including Titleist, Spalding,
Sumitomo Rubber Industries, Bridgestone and
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<PAGE>
others. These competitors have established market share in the golf ball
business, that the Company will need to penetrate in order for the Company's
golf ball business to be successful.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had 2,252 full-
time employees, including 277 employed in sales and marketing, 199 employed in
research and development and product engineering and 1,226 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
ITEM 2. PROPERTIES.
The Company and its subsidiaries conduct operations in both owned and
leased properties, located primarily near the Company's headquarters in
Carlsbad, California. The 12 buildings utilized in the Company's Carlsbad
operations include corporate offices, manufacturing, research and development,
warehousing and distribution facilities, and comprise approximately 881,000
square feet of space. Nine of these properties, representing approximately
644,000 square feet of space are owned by the Company; an additional three
properties, representing approximately 237,000 square feet of space, are leased.
These properties include a golf ball manufacturing plant currently under
construction for its wholly-owned subsidiary, Callaway Golf Ball Company. In
addition, the Company and its subsidiaries conduct certain international
operations outside of the United States, located in the United Kingdom, Canada,
Japan and Korea, in leased facilities comprising approximately 92,628 square
feet.
As part of its restructuring plan, the Company plans to sell certain of its
buildings, which house a portion of its manufacturing and research and
development activities. The Company believes that its facilities currently are
adequate to meet its requirements and will continue to be following the
consummation of the sales.
ITEM 3. LEGAL PROCEEDINGS.
The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the 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
which may be covered by insurance, or the financial impact with respect to these
matters. However, management believes that the final resolution of these
matters, individually and in the aggregate, will not
13
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have a material adverse effect upon the Company's annual consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information concerning certain of the Company's officers is
set forth below.
<TABLE>
<CAPTION>
Name Age Position(s) Held
- -------------------------- -------- -------------------------------------------------------------------------
<S> <C> <C>
Ely Callaway.............. 79 Founder, Chairman, President and Chief Executive Officer
Ronald A. Drapeau......... 52 Senior Executive Vice President, Manufacturing
Richard C. Helmstetter.... 57 Senior Executive Vice President, Chief of New Golf Club Products
Steven C. McCracken....... 48 Executive Vice President, Licensing, Chief Legal Officer and Secretary
Bruce Parker.............. 43 Senior Executive Vice President, U.S. Sales, and Chief Merchant
Frederick R. Port......... 57 Senior Executive Vice President, International Sales
David A. Rane............. 44 Executive Vice President, Administration and Planning, and Chief
Financial Officer
Charles J. Yash........... 50 Senior Executive Vice President, Golf Balls
</TABLE>
Ely Callaway, Founder, has served as President and Chief Executive Officer
since October 1998, and also has served as Chairman of the Board of the Company
since the Company's formation in 1982. Mr. Callaway also currently serves as
Chairman of the Executive and Compensation Committee, and as Chairman of the
Company is a non-voting advisor of all other Board committees. He served as
Chief Executive Officer from 1982 to May 1996, and Chief of Advertising, Press
and Public Relations from April 1997 to October 1998. From 1974 to 1981, Mr.
Callaway founded and operated Callaway Vineyard and Winery in Temecula,
California, until it was sold. From 1946 to 1973, Mr. Callaway worked in the
textile industry, where he served as a Divisional President of several major
divisions of Burlington Industries, Inc., and in 1968 was elected Corporate
President and Director of Burlington, which at the time was the world's largest
textile company. Prior to 1945, Mr. Callaway served a five-year tour of duty in
the U.S. Army Quartermaster Corps. Mr. Callaway is a 1940 graduate of Emory
University.
Ronald A. Drapeau has served as Senior Executive Vice President,
Manufacturing, since February 1999 and as President and Chief Executive Officer
of Odyssey Golf, Inc., a wholly-owned subsidiary of the Company since August
1997. Mr. Drapeau served as Executive Vice President of the Company from August
1997 to February 1999, and served as a consultant to the Company from November
1996 to August 1997. From April 1993 to September 1996, Mr. Drapeau served as
Chief Executive Officer of Lynx Golf, Inc., a subsidiary of Zurn Industries,
Inc., and served as Senior Vice President and Chief Financial Officer of Zurn
Industries, Inc. from 1992 to 1993. He is a 1969 graduate of Bentley College.
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Golf Club Products since February 1998 and as Senior
Executive Vice President, Chief of New Products from 1993 to February 1998. Mr.
Helmstetter served as President from 1990 to 1993 and as Executive Vice
President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as
President of Adam Ltd., a pool cue manufacturing and merchandising company which
he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also
consulted extensively for several Japanese, European and American companies,
including Bridgestone Corporation's strategic planning group. Mr. Helmstetter
is a 1966 graduate of the University of Wisconsin.
14
<PAGE>
Steven C. McCracken has served as Executive Vice President, Licensing and
Chief Legal Officer since April 1997 and as Secretary since April 1994. He has
served as an Executive Vice President since April 1996 and served as General
Counsel from April 1994 to April 1997. He served as Vice President from April
1994 to April 1996. Prior to joining the Company, Mr. McCracken was a partner
at Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of
law for over 18 years. During part of that period, he provided legal services
to the Company. Mr. McCracken received a B.A., magna cum laude, from the
University of California at Irvine in 1972 and a J.D. from the University of
Virginia in 1975.
Bruce Parker has served as a Director of the Company since July 1996,
Senior Executive Vice President, U.S. Sales, since 1993 and Chief Merchant since
1991. He has held the office of President and Chief Executive Officer of
Callaway Golf Sales Company, the Company's wholly-owned U.S. sales subsidiary,
since 1995 and 1997, respectively. Mr. Parker also has served the Company in
various vice presidential positions since 1984 and became Executive Vice
President, Chief Merchant in October 1991. Prior to 1984, Mr. Parker worked as
a sales manager for various golf club manufacturers in California.
Frederick R. Port has served as Senior Executive Vice President,
International Sales since April 1997 and as a Director since October 1995. He
has held the position of President of Callaway Golf International, the
International Sales Division of the Company, since 1996 and President of ERC
International Company since October 1998. He served as Executive Vice
President, International Sales, Licensing and Business Development of the
Company from April 1996 to April 1997. He served as Executive Vice President,
Business Development, of the Company from September 1995 to April 1996. From
1993 to 1995, Mr. Port was the Managing Director of Korn/Ferry International for
the Southern California region (an executive recruiting and strategic consulting
firm). From 1987 to 1992, he was the President and a Director of the Owl
Companies (a company providing military base services management, construction
materials production and sale, industrial and commercial real estate development
and power development). Prior to that, he served with several companies in a
variety of executive positions, including Chairman, Chief Executive Officer and
Director of Santa Anita Development Corporation, Vice President, Finance and
Asset Management, of the Victor Palmieri Company and consultant for Booz, Allen
and Hamilton. Mr. Port served as an infantry officer in the United States Army.
He is a 1963 graduate of UCLA and received his MBA with honors from UCLA in
1966.
David A. Rane has served the Company as Executive Vice President,
Administration and Planning, since October 1997 and as Chief Financial Officer
since January 1994. He has served as an Executive Vice President since April
1996, and served as Vice President from January 1994 to April 1996 and as
Director of Investor Relations from June 1993 to January 1994. Prior to 1993,
Mr. Rane was a senior manager for the accounting firm of Price Waterhouse LLP
(now PricewaterhouseCoopers LLP), and served a total of 14 years in public
accounting. Mr. Rane is a 1978 graduate of Brigham Young University.
Charles J. Yash has served as a Director of the Company since July 1996,
Senior Executive Vice President of the Company since February 1999, and as
President and Chief Executive Officer of Callaway Golf Ball Company, a wholly-
owned subsidiary of the Company, since June 1996. Mr. Yash served as an
Executive Vice President of the Company from February 1998 to February 1999.
From 1992 to June 1996, Mr. Yash was President and Chief Executive Officer and a
Director of Taylor Made Golf Company. From 1979 to 1992, Mr. Yash was employed
in various marketing positions with the golf products division of Spalding
Sports Worldwide, including Corporate Vice President and General Manager-Golf
Products, from 1988 to 1992. From 1970 to 1975, Mr. Yash served in the United
States Navy in various positions. Mr. Yash completed the Advanced Executive
Program at the University of Massachusetts in 1982, received his M.B.A. in 1977
from Harvard Business School and graduated with a Bachelor of Science degree
from the U.S. Naval Academy in 1970.
The Company has employment agreements with Messrs. Callaway, Parker,
McCracken, Port and Rane for terms commencing January 1, 1997 and ending
December 31, 1999. The Company also has an employment agreement with Mr. Yash
that commenced May 15, 1996 and ends on May 14, 2001, and Mr. Drapeau which
commenced August 11, 1997 and ends on December 31, 1999. The Company has a
three-year employment agreement with Mr. Helmstetter commencing January 1, 1998
which may be extended by either the Company or Mr. Helmstetter until as late as
December 31, 2012.
15
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to Item 5 is contained on page 39 of the Company's
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to Item 6 is contained on page 7 of the Company's
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Information in response to Item 7 is contained on pages 8 through 18 of the
Company's 1998 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to Item 8 is contained on pages 19 through 39 of
the Company's 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information concerning the Company's executive officers is included
under the caption "Executive Officers of the Registrant" following Part I, Item
4. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and greater than 10% shareholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of Company securities with the Securities and Exchange Commission and the
New York Stock Exchange. Based solely on its review of copies of such forms and
such written representations regarding compliance with such filing requirements
as were received from its executive officers, directors and greater than 10%
shareholders, the Company believes that all such Section 16(a) filing
requirements were complied with during 1998.
Other information required by Item 10 has been included in the Company's
definitive proxy statement under the caption "Election of Directors," as filed
with the Securities and Exchange Commission (the "Commission") on April 1, 1999
pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as Exhibits 10.13 to 10.17
to this Report. Information required by Item 11 has been included in the
Company's definitive proxy statement under the captions "Compensation of
Executive Officers," "Report of the Executive and Compensation Committee of the
Board of Directors on Executive Compensation," "Performance Graph" and "Election
of Directors," as filed with the Commission on April 1, 1999 pursuant to
Regulation 14A, which information is incorporated herein by reference.
16
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 has been included in the Company's
definitive proxy statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on April 1, 1999 pursuant
to Regulation 14A, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 has been included in the Company's
definitive proxy statement under the caption "Certain Transactions," as filed
with the Commission on April 1, 1999 pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of Callaway Golf Company and its subsidiaries included
in Part II, Item 8, are incorporated by reference from pages 19
through 39 of the 1998 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Operations for the three years ended
December 31, 1998
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998
Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial Statement
Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits.
3.1.1 Restated Articles of Incorporation of the Company.(2)
3.1.2 Certificate of Amendment of Articles of Incorporation,
effective February 10, 1995.(3)
3.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior
Participating Preferred Stock.(4)
3.3 Bylaws of the Company (as amended through May 10,
1996).(8)
4.1 Dividend Reinvestment and Stock Purchase Plan.(1)
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights Agent
dated as of June 21, 1995.(4)
17
<PAGE>
Executive Compensation Contracts/Plans
--------------------------------------
10.1 Chairman and Founder Employment Agreement by and
between the Company and Ely Callaway entered into as
of January 1, 1997.(14)
10.2 Chief Executive Officer Employment Agreement by and
between the Company and Donald H. Dye entered into as
of January 1, 1997.(16)
10.3 Executive Officer Employment Agreement by and between
the Company and Bruce Parker entered into as of
January 1, 1997.(12)
10.4 Executive Officer Employment Agreement by and between
the Company and Richard Helmstetter entered into as of
January 1, 1998.(17)
10.5 Executive Officer Employment Agreement by and between
the Company and John Duffy entered into as of January
1, 1997.(12)
10.6 Executive Officer Employment Agreement by and between
the Company and Steven C. McCracken entered into as of
January 1, 1997.(12)
10.7.1 Executive Officer Employment Agreement by and between
the Company and Frederick R. Port entered into as of
January 1, 1997.(12)
10.7.2 Stock Option Agreement by and between the Company and
Frederick R. Port dated as of September 1, 1995.(5)
10.8 Executive Officer Employment Agreement by and between
the Company and David Rane entered into as of January
1, 1997.(12)
10.9.1 Officer Employment Agreement by and between the
Company and Charles Yash entered into as of May 15,
1996.(10)
10.9.2 Stock Option Agreement by and between the Company and
Charles J. Yash dated as of May 10, 1996.(9)
10.10.1 Agreement between the Company and Donald H. Dye dated
as of October 15, 1998.+
10.10.2 Consulting Agreement between the Company and Donald H.
Dye dated as of October 15, 1998. +
10.11.1 Form of Tax Indemnification Agreement.(4)
10.11.2 Amendment No. 1 to Form of Tax Indemnification
Agreement.(11)
10.12 Executive Deferred Compensation Plan (as amended and
restated, effective January 1, 1998).(18)
10.13 Callaway Golf Company Executive Non-Discretionary
Bonus Plan.(13)
10.14 1991 Stock Incentive Plan (as amended and restated
April 1994).(3)
10.15 Amended and Restated Stock Option Plan effective April
2, 1991.(7)
10.16 1996 Stock Option Plan (as amended and restated
through April 23, 1998).(19)
10.17 Callaway Golf Company 1998 Stock Incentive Plan
effective February 18, 1998.(19)
10.18 Callaway Golf Company Non-Employee Directors Stock
Option Plan (as amended and restated through April 23,
1998).(19)
10.19.1 Form of Indemnification Agreement by and between the
Company and the following directors: William Baker,
Richard Rosenfield, William Schreyer and Michael
Sherwin, all dated January 25, 1995.(3)
10.19.2 Indemnification Agreement by and between the Company
and Ms. Aulana L. Peters, Director, dated July 18,
1996.(12)
10.19.3 Indemnification Agreement by and between the Company
and Vernon E. Jordan, Jr. dated July 16, 1997.(16)
10.19.4 Indemnification Agreement by and between Callaway Golf
Company and Yotaro Kobayashi dated as of June 4,
1998.(19)
Other Contracts
---------------
10.20.1 Loan Agreement by and between the Company and First
Interstate Bank of California dated December 1,
1994.(3)
10.20.2 Amended and Restated Revolving Credit Note made by the
Company in the principal amount of $50,000,000 and
payable to First Interstate Bank of California, dated
December 1, 1995 and First Amendment to Loan Agreement
by and between the Company and First Interstate Bank
of California dated December 1, 1995.(8)
10.20.3 Extension of Amended and Restated Revolving Credit
Note dated December 11, 1997.(17)
10.20.4 Revolving Loan Agreement, dated February 4, 1998 among
Callaway Golf Company, certain lenders therein named
and Wells Fargo Bank, National Association as
Administrative Agent.(18)
18
<PAGE>
10.21.1 Credit Agreement dated as of December 30, 1998, among
Callaway Golf Company, the other Credit Parties
signatory thereto, the Lenders signatory thereto from
time to time and General Electric Capital Corporation,
as Agent for the Lenders.(20)
10.21.2 Amended and Restated Credit Agreement dated as of
February 10, 1999, among Callaway Golf Company, as
Borrower, the other credit parties signatory thereto,
as Credit Parties, the Lenders signatory thereto from
time to time and General Electric Capital Corporation,
as Agent and Lender.(21)
10.21.3 Receivables Transfer Agreement dated as of February
10, 1999, by and among Callaway Golf Sales Company and
Odyssey Golf, Inc.(21)
10.21.4 Receivables Transfer Agreement dated as of February
10, 1999, by and among Callaway Golf Company, as
Parent Guarantor, Callaway Golf Sales Company, as the
CGS Originator and as Servicer, and Golf Funding
Corporation.(21)
10.21.5 Receivables Purchase and Servicing Agreement dated as
of February 10, 1999, by and among Golf Funding
Corporation, as Seller, Redwood Receivables
Corporation, as Purchaser, Callaway Golf Sales
Company, as Servicer, and General Electric Capital
Corporation, as Operating Agent and Collateral
Agent.(21)
10.22 Trust Agreement between Callaway Golf Company and
Sanwa Bank California as Trustee, for the benefit of
participating employees, dated July 14, 1995.(6)
10.23 Asset Purchase Agreement dated July 20, 1997 by and
among Callaway Golf Company, Odyssey Sports, Inc. and
U.S. Industries, Inc.(15)
10.24 Operating Agreement for Callaway Golf Media Ventures,
LLC, a California Limited Liability Company, executed
as of January 26, 1998, by and between Callaway Golf
Company and Callaway Editions, Inc.(18)
10.25 Loan Forgiveness Agreement effective as of March 8,
1999, by and among Callaway Golf Company and Callaway
Golf Media Ventures, LLC.+
10.26 Membership Interest Purchase Agreement effective as of
March 8, 1999, by and among Callaway Golf Company and
Callaway Editions, Inc.+
10.27 Loan Termination Agreement effective as of March 10,
1999, by and among Callaway Golf Company and Callaway
Golf Media Ventures, LLC.+
10.28 Trademark License Agreement effective as of March 9,
1999, by and between Callaway Golf Company and
Callaway Golf Media Ventures, LLC.+
13.1 Portions of the Company's 1998 Annual Report to
Shareholders (with the exception of the information
incorporated by reference specifically in this Report
on Form 10-K, the 1998 Annual Report to Shareholders
is not deemed to be filed as a part of this Report on
Form 10-K).+
21.1 List of Subsidiaries.+
23.1 Consent of Independent Accountants.+
27.1 Financial Data Schedule for the Year Ended December
31, 1998.+
+ Included in this Report.
(1) Included as the Prospectus in the Company's
Registration Statement on Form S-3 (No. 33-77024), as
filed with the Securities and Exchange Commission on
March 29, 1994, and incorporated herein by reference.
(2) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-85692), as filed with
the Securities and Exchange Commission on October 28,
1994, and incorporated herein by reference.
(3) Included as an exhibit to the Company's 1994 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1995, and
incorporated herein by reference.
19
<PAGE>
(4) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1995, as filed with the Securities and Exchange
Commission on August 12, 1995, and incorporated herein
by reference.
(5) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-98750), as filed with
the Securities and Exchange Commission on October 30,
1995, and incorporated herein by reference.
(6) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1995, as filed with the Securities and Exchange
Commission on November 14, 1995, and incorporated
herein by reference.
(7) Included as an exhibit to the Company's 1995 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.
(8) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5719), as filed with
the Securities and Exchange Commission on June 11,
1996, and incorporated herein by reference.
(9) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5721), as filed with
the Securities and Exchange Commission on June 11,
1996, and incorporated herein by reference.
(10) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1996, as filed with the Securities and Exchange
Commission on August 14, 1996, and incorporated herein
by reference.
(11) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1996, as filed with the Securities and Exchange
Commission on November 13, 1996, and incorporated
herein by reference.
(12) Included as an exhibit to the Company's 1996 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1997, and
incorporated herein by reference.
(13) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1997, as filed with the Securities and Exchange
Commission on May 15, 1997, and incorporated herein by
reference.
(14) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1997, as filed with the Securities and Exchange
Commission on August 14, 1997, and incorporated herein
by reference.
(15) Included as an exhibit to the Company's Current Report
on Form 8-K dated August 8, 1997, as filed with the
Securities and Exchange Commission on August 22, 1997,
and incorporated herein by reference.
(16) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997, as filed with the Securities and Exchange
Commission on November 14, 1997, and incorporated
herein by reference.
(17) Included as an exhibit to the Company's Annual Report
on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1998, and
incorporated herein by reference.
(18) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1998, and incorporated herein by reference.
20
<PAGE>
(19) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1998, and incorporated herein by reference.
(20) Included as an exhibit to the Company's Current Report
on Form 8-K dated January 28, 1999, and incorporated
herein by reference.
(21) Included as an exhibit to the Company's Current Report
on Form 8-K dated February 25, 1999, and incorporated
herein by reference.
(b) Reports on Form 8-K:
(1) On October 22, 1998, the Company filed a Current Report on Form
8-K reporting that Donald H. Dye would no longer be serving as
President and Chief Executive Officer or as a director of the
Company. The Company also reported that Ely Callaway, the
Company's Founder and Chairman, would reassume the additional
roles of President and Chief Executive Officer.
(2) On January 28, 1999, the Company filed a Current Report on Form 8-
K reporting that the Company had entered into a credit agreement
on December 30, 1998, providing revolving credit facilities of up
to $75 million (including a $10 million letter of credit
subfacility).
(3) On February 25, 1999, the Company filed a Current Report on Form
8-K reporting that effective February 12, 1999, the Company had
entered into an amended and restated credit agreement which
increased the revolving credit facilities from the original $75
million to up to $120 million. The Company also reported that
effective February 12, 1999, Odyssey Golf, Inc. and Callaway Golf
Sales Company, both wholly-owned subsidiaries of the Company, Golf
Funding Corporation, a newly formed wholly-owned subsidiary of
Callaway Golf Sales Company, and the Company obtained an $80
million accounts receivable securitization facility.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
/s/ ELY CALLAWAY
-------------------------------------
Date: March 31, 1999 Ely Callaway
Founder, Chairman and Chief
Executive Officer
/s/ DAVID A. RANE
-------------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE Title Date
--------- ----- ----
<S> <C> <C> <C>
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:
/s/ ELY CALLAWAY Founder, Chairman, and Chief March 31, 1999
--------------------------------------- Executive Officer
Ely Callaway
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ DAVID A. RANE Executive Vice President, March 31, 1999
--------------------------------------- Administration and Planning, and
David A. Rane Chief Financial Officer
OTHER DIRECTORS:
/s/ WILLIAM C. BAKER Director March 31, 1999
---------------------------------------
William C. Baker
/s/ VERNON E. JORDAN, JR. Director March 31, 1999
---------------------------------------
Vernon E. Jordan, Jr.
/s/ YOTARO KOBAYASHI Director March 31, 1999
------------------------------------
Yotaro Kobayashi
/s/ BRUCE PARKER Director March 31, 1999
---------------------------------------
Bruce Parker
/s/ AULANA L. PETERS Director March 31, 1999
---------------------------------------
Aulana L. Peters
/s/ FREDERICK R. PORT Director March 31, 1999
---------------------------------------
Frederick R. Port
/s/ RICHARD ROSENFIELD Director March 31, 1999
---------------------------------------
Richard Rosenfield
/s/ WILLIAM SCHREYER Director March 31, 1999
---------------------------------------
William Schreyer
/s/ CHARLES J. YASH Director March 31, 1999
---------------------------------------
Charles J. Yash
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Callaway Golf Company
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1999, except as to Note 16, which is as of February 12, 1999,
appearing on page 38 of the 1998 Annual Report to Shareholders of Callaway Golf
Company (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 26, 1999
23
<PAGE>
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Allowance Allowance Allowance
for Doubtful for Obsolete for Warranty
Date Accounts Inventory Costs
- ------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, December 31, 1995 $ 6,410 $ 4,796 $ 23,769
Provision 231 800 10,735
Write-off (304) (312) (7,201)
Recovery
--------------------------------------------------------
Balance, December 31, 1996 6,337 5,284 27,303
Provision 1,354 743 13,726
Write-off (645) (353) (12,970)
Recovery
--------------------------------------------------------
Balance, December 31, 1997 7,046 5,674 28,059
Provision 4,171 33,214 24,681
Write-off (1,278) (2,040) (16,925)
Recovery
--------------------------------------------------------
Balance, December 31, 1998 $ 9,939 $36,848 $ 35,815
========================================================
</TABLE>
24
<PAGE>
EXHIBIT INDEX
EXHIBITS
- --------
3.1.1 Restated Articles of Incorporation of the Company.(2)
3.1.2 Certificate of Amendment of Articles of Incorporation, effective
February 10, 1995.(3)
3.2 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series A Junior Participating Preferred Stock.(4)
3.3 Bylaws of the Company (as amended through May 10, 1996).(8)
4.1 Dividend Reinvestment and Stock Purchase Plan.(1)
4.2 Rights Agreement by and between the Company and Chemical Mellon
Shareholder Services as Rights Agent dated as of June 21, 1995.(4)
Executive Compensation Contracts/Plans
--------------------------------------
10.1 Chairman and Founder Employment Agreement by and between the Company
and Ely Callaway entered into as of January 1, 1997.(14)
10.2 Chief Executive Officer Employment Agreement by and between the Company
and Donald H. Dye entered into as of January 1, 1997.(16)
10.3 Executive Officer Employment Agreement by and between the Company and
Bruce Parker entered into as of January 1, 1997.(12)
10.4 Executive Officer Employment Agreement by and between the Company and
Richard Helmstetter entered into as of January 1, 1998.(17)
10.5 Executive Officer Employment Agreement by and between the Company and
John Duffy entered into as of January 1, 1997.(12)
10.6 Executive Officer Employment Agreement by and between the Company and
Steven C. McCracken entered into as of January 1, 1997.(12)
10.7.1 Executive Officer Employment Agreement by and between the Company and
Frederick R. Port entered into as of January 1, 1997.(12)
10.7.2 Stock Option Agreement by and between the Company and Frederick R. Port
dated as of September 1, 1995.(5)
10.8 Executive Officer Employment Agreement by and between the Company and
David Rane entered into as of January 1, 1997.(12)
10.9.1 Officer Employment Agreement by and between the Company and Charles
Yash entered into as of May 15, 1996.(10)
10.9.2 Stock Option Agreement by and between the Company and Charles J. Yash
dated as of May 10, 1996.(9)
10.10.1 Agreement between the Company and Donald H. Dye dated as of October 15,
1998.+
10.10.2 Consulting Agreement between the Company and Donald H. Dye dated as of
October 15, 1998.+
10.11.1 Form of Tax Indemnification Agreement.(4)
10.11.2 Amendment No. 1 to Form of Tax Indemnification Agreement.(11)
10.12 Executive Deferred Compensation Plan (as amended and restated,
effective January 1, 1998).(18)
10.13 Callaway Golf Company Executive Non-Discretionary Bonus Plan.(13)
10.14 1991 Stock Incentive Plan (as amended and restated April 1994).(3)
10.15 Amended and Restated Stock Option Plan effective April 2, 1991.(7)
10.16 1996 Stock Option Plan (as amended and restated through April 23,
1998).(19)
10.17 Callaway Golf Company 1998 Stock Incentive Plan effective February 18,
1998.(19)
10.18 Callaway Golf Company Non-Employee Directors Stock Option Plan (as
amended and restated April 17, 1996).(19)
10.19.1 Form of Indemnification Agreement by and between the Company and the
following directors: William Baker, Richard Rosenfield, William
Schreyer and Michael Sherwin, all dated January 25, 1995.(3)
25
<PAGE>
10.19.2 Indemnification Agreement by and between the Company and Ms. Aulana L.
Peters, Director, dated July 18, 1996.(12)
10.19.3 Indemnification Agreement by and between the Company and Vernon E.
Jordan, Jr. dated July 16, 1997.(16)
10.19.4 Indemnification Agreement by and between Callaway Golf Company and
Yotaro Kobayashi dated as of June 4, 1998.(19)
Other Contracts
---------------
10.20.1 Loan Agreement by and between the Company and First Interstate Bank of
California dated December 1, 1994.(3)
10.20.2 Amended and Restated Revolving Credit Note made by the Company in the
principal amount of $50,000,000 and payable to First Interstate Bank of
California, dated December 1, 1995 and First Amendment to Loan
Agreement by and between the Company and First Interstate Bank of
California dated December 1, 1995.(8)
10.20.3 Extension of Amended and Restated Revolving Credit Note dated December
11, 1997.(21)
10.20.4 Revolving Loan Agreement, dated February 4, 1998 among Callaway Golf
Company, certain Lenders therein named and Wells Fargo Bank, National
Association as Administrative Agent.(18)
10.21.1 Credit Agreement dated as of December 30, 1998, among Callaway Golf
Company, the other Credit Parties signatory thereto, the lenders
signatory thereto from time to time and General Electric Capital
Corporation, as Agent for the Lenders.(20)
10.21.2 Amended and Restated Credit Agreement dated as of February 10, 1999,
among Callaway Golf Company, as Borrower, the other credit parties
signatory thereto, as Credit Parties, the Lenders signatory thereto
from time to time and General Electric Capital Corporation , as Agent
and Lender.(21)
10.21.3 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Sales Company and Odyssey Golf, Inc.(21)
10.21.4 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Company, as Parent Guarantor, Callaway Golf Sales
Company, as the CGS Originator and as Servicer, and Golf Funding
Corporation.(21)
10.21.5 Receivables Purchase and Servicing Agreement dated as of February 10,
1999, by and among Golf Funding Corporation, as Seller, Redwood
Receivables Corporation, as Purchaser, Callaway Golf Sales Company, as
Servicer, and General Electric Capital Corporation, as Operating Agent
and Collateral Agent.(21)
10.22 Trust Agreement between Callaway Golf Company and Sanwa Bank California
as Trustee, for the benefit of participating employees, dated July 14,
1995.(6)
10.23 Asset Purchase Agreement dated July 20, 1997 by and among Callaway Golf
Company, Odyssey Sports, Inc. and U.S. Industries, Inc.(15)
10.24 Operating Agreement for Callaway Golf Media Ventures, LLC, a California
Limited Liability Company, executed as of January 26, 1998, by and
between Callaway Golf Company and Callaway Editions, Inc.(18)
10.25 Loan Forgiveness Agreement effective as of March 8, 1999, by and among
Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
10.26 Membership Interest Purchase Agreement effective as of March 8, 1999,
by and among Callaway Golf Company and Callaway Editions, Inc.+
10.27 Loan Termination Agreement effective as of March 10, 1999, by and among
Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
10.28 Trademark License Agreement effective as of March 9, 1999, by and
between Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
13.1 Portions of the Company's 1998 Annual Report to Shareholders (with the
exception of the information incorporated by reference specifically in
this Report on Form 10-K, the 1998 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on Form 10-K).+
21.1 List of Subsidiaries.+
23.1 Consent of Independent Accountants.+
27.1 Financial Data Schedule for the Year Ended December 31, 1998.+
+ Included in this Report.
(1) Included as the Prospectus in the Company's Registration Statement on
Form S-3 (No. 33-77024), as filed with the Securities and Exchange
Commission on March 29, 1994, and incorporated herein by reference.
26
<PAGE>
(2) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 33-85692), as filed with the Securities and Exchange
Commission on October 28, 1994, and incorporated herein by reference.
(3) Included as an exhibit to the Company's 1994 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on March 31,
1995, and incorporated herein by reference.
(4) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995, as filed with the Securities and
Exchange Commission on August 12, 1995, and incorporated herein by
reference.
(5) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 33-98750), as filed with the Securities and Exchange
Commission on October 30, 1995, and incorporated herein by reference.
(6) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995, as filed with the Securities
and Exchange Commission on November 14, 1995, and incorporated herein
by reference.
(7) Included as an exhibit to the Company's 1995 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on April 1,
1996, and incorporated herein by reference.
(8) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 333-5719), as filed with the Securities and Exchange
Commission on June 11, 1996, and incorporated herein by reference.
(9) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 333-5721), as filed with the Securities and Exchange
Commission on June 11, 1996, and incorporated herein by reference.
(10) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, as filed with the Securities and
Exchange Commission on August 14, 1996, and incorporated herein by
reference.
(11) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996, as filed with the Securities
and Exchange Commission on November 13, 1996, and incorporated herein
by reference.
(12) Included as an exhibit to the Company's 1996 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference.
(13) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, as filed with the Securities and
Exchange Commission on May 15, 1997, and incorporated herein by
reference.
(14) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, as filed with the Securities and
Exchange Commission on August 14, 1997, and incorporated herein by
reference.
27
<PAGE>
(15) Included as an exhibit to the Company's Current Report on Form 8-K
dated August 8, 1997, as filed with the Securities and Exchange
Commission on August 22, 1997, and incorporated herein by reference.
(16) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, as filed with the Securities
and Exchange Commission on November 14, 1997, and incorporated herein
by reference.
(17) Included as an exhibit to the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on March 31, 1998,
and incorporated herein by reference.
(18) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, and incorporated herein by
reference.
(19) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, and incorporated herein by
reference.
(20) Included as an exhibit to the Company's Current Report on Form 8-K
dated January 28, 1999, and incorporated herein by reference.
(21) Included as an exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, and incorporated herein by reference.
28
<PAGE>
EXHIBIT 10.10.1
AGREEMENT
This Agreement ("Agreement") is effective October 15, 1998 and is made by
and between Donald H. Dye ("Mr. Dye") and Callaway Golf Company (the "Company"),
a California corporation. Mr. Dye has been employed by the Company as President
and Chief Executive Officer pursuant to his Chief Executive Officer Employment
Agreement, which was entered into as of January 1, 1997 ("Employment
Agreement"). Mr. Dye has also served as a member of the Company's Board of
Directors, and as an officer of various subsidiaries and affiliates. The
Company and Mr. Dye desire to enter into this Agreement to establish certain
terms relating to Mr. Dye's termination as an employee and officer, his
resignation as a director, and his continued service to the Company as a
consultant.
WHEREAS Mr. Dye is being terminated from the Company as an employee and
officer pursuant to section 8(a) of the Employment Agreement, is prepared to
resign as a director, and is willing to provide certain services, releases, and
other consideration to the Company in exchange for the consideration provided
herein;
WHEREAS it would be in the best interests of the Company and its
shareholders to provide Mr. Dye with the consideration provided herein in light
of Mr. Dye's service to the Company and in exchange for the services, releases
and other consideration provided by Mr. Dye pursuant to this Agreement;
NOW THEREFORE IT IS AGREED as follows between Mr. Dye and the Company:
1. Termination. Mr. Dye hereby confirms that his termination as an
-----------
employee and officer of the Company and its subsidiaries and affiliates, and his
resignation as a director of the Company, shall be effective immediately.
2. Severance. In addition to the severance benefits due Mr. Dye pursuant
---------
to section 8(a) of the Employment Agreement, and in exchange for Mr. Dye's
agreement and the other services, releases, obligations and consideration
provided herein, the Company agrees to provide Mr. Dye with additional severance
as follows:
(a) Benefits. The Company agrees (i) to pay any expense reimbursement
--------
accrued and unpaid as of the date of termination; (ii) to immediately vest the
20,000 shares of restricted stock granted to Mr. Dye by the Company on February
19, 1998 pursuant to the restricted stock grant agreement (the "Restricted Stock
Grant Agreement"); (iii) to convey to Mr. Dye the club membership in The Farms
golf club currently provided to Mr. Dye by the Company, at no cost to Mr. Dye
except that Mr. Dye shall be liable for any ongoing fees, dues and assessments,
as well as any taxes that might be due as a result of such conveyance; (iv) to
convey to Mr. Dye the laptop computer currently provided to Mr. Dye by the
Company, at no cost to Mr. Dye except that Mr. Dye shall be liable for any taxes
that might be due as a result of such conveyance, and further provided that the
Company will first remove any all data, software, or information belonging to
the Company, except that, to the extent possible, the
<PAGE>
Company will not remove the Windows and Microsoft Office software, as well as
other software designated by mutual agreement of the Company and Mr. Dye; and
(v) to continue Mr. Dye's Scripps Executive Health annual physical examination,
at Company expense, until December 31, 2001.
(b) Stock Options. The Company agrees to amend the Callaway Golf Company
-------------
Stock Option Agreement (1991 Incentive Stock Plan) entered into between Mr. Dye
and the Company with a grant date of December 4, 1995 (the "1995 Stock Option
Agreement") and the Stock Option Agreement (1991 Incentive Stock Plan) entered
into between Mr. Dye and the Company with a grant date of November 18, 1993 (the
"1993 Stock Option Agreement" by extending the expiration date of the stock
options granted to Mr. Dye pursuant to such agreements. The 1995 Stock Option
Agreement and the 1993 Stock Option Agreement shall be amended to provide that
the expiration date of the options granted pursuant to those agreements shall be
December 31, 2003.
3. Consulting Agreement. As further consideration, the Company agrees to
--------------------
offer, and Mr. Dye agrees to accept, a consulting position with the Company
pursuant to the terms and conditions of the agreement attached hereto as Exhibit
A (the "Consulting Agreement").
4. Releases.
--------
(a) In consideration of the Company's agreement to enter into this
Agreement, Mr. Dye hereby irrevocably and unconditionally releases and forever
discharges the Company, its predecessors, successors, subsidiaries, and
affiliates, as well as each and every past, present and future officer,
director, employee, representative, agent and attorney of the Company, its,
predecessors, successors, subsidiaries and affiliates, and their successors and
assigns, from any, every, and all charges, complaints, claims, causes of action,
and lawsuits including, but not limited to, those arising from or in any way
related to Mr. Dye's employment with the Company, including but not limited to,
actions based upon contract or tort, failure to progressively discipline Mr.
Dye, termination of Mr. Dye's employment, Mr. Dye's resignation as a director,
claims under the Age Discrimination in Employment Act of 1967 [29 U.S.C. 621 et
seq.], or breach of the Employment Agreement or any portion thereof, together
with any and all other claims based on the Company's employment of Mr. Dye, or
any other event occurring prior to the date of this Agreement.
(b) In consideration of Mr. Dye's agreement to enter into this Agreement,
the Company hereby irrevocably and unconditionally releases and forever
discharges Mr. Dye, his predecessors, successors, affiliates, representative and
attorney, and their successors and assigns, from any, every, and all charges,
complaints, claims, causes of action, and lawsuits including, but not limited
to, those arising from or in any way related to Mr. Dye's employment with the
Company, including but not limited to, actions based upon contract or tort,
together with any and all other claims based on the Company's employment or use
of Mr. Dye, or any other event occurring prior to the date of this Agreement.
5. Waivers. The Company and Mr. Dye each waive all rights under section
-------
1542
<PAGE>
of the Civil Code of the State of California. Section 1542 provides as follows:
A general release does not extend to claims, which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
6. Entire Agreement. This Agreement, the Employment Agreement, the
----------------
Consulting Agreement, the 1993 Stock Option Agreement (as amended as provided
herein), and the 1995 Stock Option Agreement (as amended as provided herein)
constitute the entire agreement between the parties with respect to the subject
matter hereof and may not be modified or amended, except by written agreement
signed by all parties. This Agreement and the Employment Agreement shall be
deemed to be consistent with each other, and read together, it being understood
that, to the extent necessary to give effect to this Agreement, this Agreement,
shall be deemed to be "another instrument in writing executed by the parties"
pursuant to section 16 of the Employment Agreement. Each term, condition,
covenant or provision of this Agreement shall be viewed as separate and
distinct, and in the event that any such term, covenant or provision shall be
held by a court of competent jurisdiction to be invalid, the remaining
provisions shall continue in full force and effect.
7. No Admission of Liability. This Agreement and the release contained
-------------------------
herein affect the settlement of claims which are denied and contested, and
nothing contained herein shall be construed as an admission by a party of any
liability of any kind to the other party.
8. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the internal laws of the State of California.
9. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
10. The Company's Proprietary Information and Inventions. Mr. Dye
----------------------------------------------------
acknowledges and understands that Sections 12 and 13 of the Employment Agreement
extend beyond the terms of Mr. Dye's employment with the Company. Mr. Dye
agrees to comply with such terms.
11. Return of Company Property. Subject to section 10 of the Employment
--------------------------
Agreement, Mr. Dye acknowledges that he is obligated to and will return all
Company property in his possession upon demand by the Company.
12. Knowing and Voluntary Agreement. Mr. Dye has carefully read and fully
-------------------------------
understands all of the provisions of this Agreement. Mr. Dye knowingly and
voluntarily agrees to all the terms set forth in this Agreement. Mr. Dye
knowingly and voluntarily intends to be legally bound by the same.
13. Advice of Counsel. The Company hereby advises Mr. Dye in writing to
-----------------
discuss
<PAGE>
this Agreement with an attorney before executing it, and Mr. Dye acknowledges
that he has either done so or has knowingly and voluntarily waived his right to
do so.
14. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) MR. DYE 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, OR RELATING TO MR. DYE'S EMPLOYMENT AGREEMENT,
EMPLOYMENT, OR THE TERMINATION THEREOF, THAT CANNOT BE RESOLVED BY MUTUAL
AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. THIS
INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF FEDERAL, STATE AND/OR
LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF DUTY ARISING IN CONTRACT
OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF COVENANT OF GOOD FAITH AND FAIR
DEALING, VIOLATION OF PUBLIC POLICY, VIOLATION OF ANY STATUTORY, CONTRACTUAL OR
COMMON LAW RIGHTS, BUT EXCLUDING WORKERS' COMPENSATION, UNEMPLOYMENT MATTERS, OR
ANY MATTER FALLING WITHIN THE JURISDICTION OF THE STATE LABOR COMMISSIONER. 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
CHIEF LEGAL OFFICER WITHIN ONE (1) YEAR, OR, IF LATER, WITHIN THE TIME PERIOD
STATED IN THE APPLICABLE STATUTE OF LIMITATIONS, AFTER THE DISCOVERY OF THE
ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED PARTY.
(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL RULES
STATED IN THE AMERICAN ARBITRATION ASSOCIATION ("AAA") CALIFORNIA EMPLOYMENT
DISPUTE RESOLUTION RULES. THE ARBITRATION SHALL BE CONDUCTED IN SAN DIEGO BY A
FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE IN
EMPLOYMENT-RELATED DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE AREA
OF DISPUTE, WHO SHALL HAVE THE POWERS TO HEAR MOTIONS, CONTROL DISCOVERY,
CONDUCT HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER.
THE PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE
ON THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE AMERICAN ARBITRATION
ASSOCIATION NATIONAL EMPLOYMENT DISPUTE RESOLUTION RULES.
(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
<PAGE>
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.
THE PARTIES HAVE READ PARAGRAPH 14 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE. ______ (MR. DYE'S INITIALS) ______ (INITIALED ON
BEHALF OF THE COMPANY)
15. Injunctive Relief. Mr. Dye understands that the nature of damages for
-----------------
breach of this Agreement may be such that specific performance is the only
remedy that will adequately compensate the Company for Mr. Dye's breach of this
Agreement. Mr. Dye hereby agrees to the entry of an injunction by the
arbitrator ordering such specific performance in the event of Mr. Dye's breach
of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates
set forth below.
CALLAWAY GOLF COMPANY,
a California Corporation
/s/ Donald H. Dye By: /s/ Ely Callaway
- ---------------------------- --------------------------------
Donald H. Dye Ely Callaway
Chairman
Dated: ____________________ Dated: __________________________
<PAGE>
EXHIBIT A
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of October 16,
1998, between Callaway Golf Company ("Callaway Golf"), a California corporation,
and Donald H. Dye ("Consultant").
Recitals
--------
A. Callaway Golf is in the business of designing, manufacturing and
selling golf clubs and related products using trade secrets, patented procedures
and other proprietary information. Callaway Golf is currently marketing its
products in the United States of America and internationally.
B. Consultant has been a long-time employee of Callaway Golf with
expertise in various areas relating to Callaway Golf's business.
C. Callaway Golf desires to retain access to the services and expertise of
Consultant and believes that the experience and expertise of Consultant will be
of benefit to Callaway Golf; therefore, Callaway Golf desires to enter into this
Agreement with Consultant.
D. Consultant wishes to assist Callaway Golf in its business; therefore,
Consultant desires to enter into this Agreement with Callaway Golf.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Engagement. Pursuant to the terms of the Agreement between Consultant
----------
and Callaway Golf dated October 15, 1998 relating to Consultant's termination as
an employee (the "Termination Agreement"), Callaway Golf hereby engages the
services of Consultant as a consultant, and Consultant hereby accepts such
engagement, subject to the terms and conditions of this Agreement.
2. Term/Termination. The term ("Term") of this Agreement shall commence
----------------
on October 16, 1998, and shall continue until December 31, 2001, unless
terminated in accordance with section 15 herein, or extended for the Extended
Terms as provided in Section 7. Consultant understands and agrees that the
provisions of sections 4, 12, and 19 of this Agreement shall survive termination
of the other provisions of this Agreement.
3. Services to be Performed by Consultant. During the Term and any
--------------------------------------
Extended Terms of this Agreement, Consultant shall provide consulting services,
within his expertise, on matters related to the business of Callaway Golf as may
be requested by Ely Callaway, his successor, or his express designee from time
to time. Consultant shall maintain contact with
<PAGE>
Callaway Golf through Mr. Callaway, or such person or persons as may be
designated by Mr. Callaway from time to time. Consultant represents that
Consultant has the qualifications and ability to perform the services, within
his expertise, in a professional manner without the advice, control, or
supervision of Callaway Golf. While the specific methods and manner of providing
the services shall be solely determined by Consultant, Callaway Golf shall have
the right to oversee, direct and give advice to Consultant regarding the general
extent, nature and scope of services to be performed by Consultant under this
Agreement. The services shall be provided by Consultant at such times and in
such locations as Callaway Golf and Consultant mutually agree upon from time to
time. Consultant will not be required to provide more than one hundred (100)
hours of service per year without additional compensation. Any additional hours
shall be compensated at the rate of $350 per hour. If required, Callaway Golf
shall, at no cost to Consultant, provide Consultant with office space,
secretarial assistance, and such other equipment or assistance necessary for
Consultant to provide the consulting services requested. Callaway Golf shall
approve any such expenses in advance, and in writing.
4. Assignment of Rights.
--------------------
(a) Callaway Golf shall own all deliverables delivered by Consultant
hereunder.
(b) As used in this Agreement, "Inventions," whether or not they have
been patented, trademarked, or copyrighted, means designs, inventions,
technologies, methods, innovations, ideas, improvements, processes, materials,
sources of and uses for materials, apparatus, plans, systems and computer
programs relating to the design, manufacture, use, marketing, distribution and
management of Callaway Golf's and/or its affiliates' products.
(c) All works of authorship produced under this Agreement shall be
"works for hire" produced exclusively for Callaway Golf, and all rights thereto
shall belong to Callaway Golf. As a material part of the terms and
understandings of this Agreement, Consultant hereby assigns to Callaway Golf all
works of authorship and all Inventions relating to the business of Callaway Golf
and/or its affiliates, and all intellectual property rights therein (including
without limitation all patent rights, copyrights, and trade secret rights),
which Consultant creates, develops, conceives and/or reduces to practice, either
alone or with anyone else, during the course of providing the Services under
this Agreement, regardless of whether they are suitable to be patented,
trademarked and/or copyrighted.
(d) Consultant agrees to disclose to the President and Chief Executive
Officer of Callaway Golf any work of authorship and/or Invention relating to the
business of Callaway Golf and/or its affiliates, which Consultant develops,
conceives and/or reduces to practice, either alone or with anyone else, during
the Term and any Extended Terms of this Agreement. Consultant shall make a
limited disclosure of such works of authorship and/or Inventions to Callaway
Golf, even if Consultant does not believe that Consultant is required under this
Agreement to assign Consultant's interest in such work of authorship and/or
Invention to Callaway Golf. Callaway Golf agrees to keep such information as
confidential information. If Callaway Golf and Consultant disagree as to
whether or not a work of
<PAGE>
authorship and/or an Invention is included within the terms of this Agreement,
it will be the responsibility of Consultant to prove that it is not included
and/or that assignment to Callaway Golf is not required.
(e) The obligation to assign as provided in this Agreement does not
apply to any work of authorship or any Invention to the extent such obligation
would conflict with any applicable state or federal law. All provisions of this
Agreement relating to the assignment by Consultant of works of authorship and
Inventions are subject to the provisions of California Labor Code Sections 2870,
2871 and 2872.
(f) Upon Callaway Golf's request, at no expense to Consultant,
Consultant shall execute any and all proper applications for patents, copyrights
and/or trademarks, assignments to Callaway Golf, and all other applicable
documents, and will give testimony when and where requested to perfect the
title, copyrights, trademarks and/or patents (both within and without the United
States) in all works of authorship and Inventions assigned to Callaway Golf
hereunder.
(g) Consultant agrees that if in the course of performing the
consulting services, Consultant incorporates any other Invention owned by
Consultant or for which Consultant has the right to grant the rights granted in
this Section 4(g) ("Consultant Inventions"), into any report, presentation,
---------------------
recommendation, process, method, tooling, design, machine, equipment, product or
other item recommended, presented, developed, implemented or specified by
Consultant for or to Callaway Golf under this Agreement, Consultant hereby
grants to Callaway Golf a nonexclusive, transferable, royalty-free, perpetual,
irrevocable, worldwide license under said Consultant Invention to make, have
made, import, modify, and use any product or other item embodying or using said
Consultant Invention. Consultant will provide to Callaway Golf copies of all
patents and patent applications related to all such Consultant Inventions.
(h) Consultant agrees that if in the course of performing the services,
Consultant recommends the use of any third party Inventions which, to the
knowledge of Consultant, are or may be covered by patents held by third parties,
that Consultant will disclose such information to Callaway Golf.
5. Other Compensation. In addition to any compensation paid to Consultant
------------------
pursuant to sections 3 or 7 of this Agreement, Callaway Golf agrees to pay
Consultant as follows:
(a) During the Term and any Extended Terms, Callaway Golf shall
reimburse Consultant for all reasonable, customary and necessary expenses for
travel and lodging incurred in the performance of the services to be provided
hereunder. Consultant shall account for such expenses by submitting a signed
statement itemizing such expenses prepared in accordance with the policies set
by Callaway Golf for reimbursement of such expenses. The amount, nature and
extent of such expenses shall always be subject to the control, supervision and
direction of Callaway Golf.
<PAGE>
(b) During any Extended Terms, Callaway Golf shall provide for
Consultant to participate in Callaway Golf's health insurance and disability
insurance plans as the same may be modified from time to time, and to receive,
if Consultant is insurable under usual underwriting standards and Consultant's
physical condition does not prevent Consultant from reasonably qualifying for
such insurance coverage, term life insurance coverage of Consultant's life,
payable to whomever the Consultant directs, in the face amount of $2,000,000.00,
such policies to be transferable to Consultant upon termination of this
Agreement without evidence of insurability. Callaway Golf shall also provide,
at its expense, for Consultant to participate annually in the Executive Health
Program at Scripp's Hospital. It is recognized that all or part of the expenses
associated with these benefits may be treated as taxable compensation to
Consultant, and that Callaway Golf shall not be responsible for any taxes that
may be due as a result.
(c) During the Term and any Extended Terms, Consultant shall be
allowed to purchase, in accordance with Callaway Golf's reasonable procedures,
golf equipment made by Callaway Golf and available generally to Callaway Golf's
customers at Callaway Golf's regular U.S. wholesale price so long as (i) such
golf equipment is for the personal use of Consultant or his immediate family, or
is to be provided by Consultant as a gift, and not in exchange for any
remuneration, services, barter, or other compensation, to another for the
other's personal use, and (ii) the total amount of such golf equipment purchases
by Consultant from Callaway Golf in any one calendar year does not exceed
$10,000.00.
6. Relationship of the Parties. Consultant enters into this Agreement as,
---------------------------
and shall continue to be, an independent contractor. Under no circumstances
shall Consultant look to Callaway Golf as Consultant's employer, or as a
partner, agent, or principal. Except as otherwise specifically provided herein,
while Consultant is engaged as a Consultant pursuant to this Agreement, Callaway
Golf will not provide Consultant with benefits accorded to Callaway Golf
employees, regardless of whether Consultant is later re-classified as an
employee of Callaway Golf, including but not limited to:
. Workers' compensation insurance;
. Access to any type of employee benefit plan, including but not
limited to Callaway Golf's 401(k) and employee stock purchase
plans;
. Vacation leave and/or sick pay.
7. Extended Terms. At Callaway Golf's option, this Agreement may be
--------------
extended for up to two (2) one-year Extended Terms for the calendar years 2002
and 2003. If Callaway Golf so elects, then Callaway Golf shall compensate
Consultant during any such Extended Term at the rate of $200,000.00 per year,
payable in equal monthly installments. Except as otherwise provided, the terms
and conditions of this Agreement shall continue to define the relationship
between Callaway Golf and Consultant, including the obligation of Callaway Golf
to pay Consultant additional compensation for hours of service beyond one
hundred (100) hours per year at the rate of $350 per hour.
<PAGE>
8. Extent of Authority. Consultant shall have no authority or right to
-------------------
commit or bind Callaway Golf and/or its affiliates to any agreement or
arrangement or to obligate Callaway Golf and/or its affiliates in any manner.
9. Exclusive Dealings. During the Term and any Extended Terms of this
------------------
Agreement, to the fullest extent permitted by law, Consultant agrees that he
will not, directly or indirectly, whether as agent, consultant, attorney, holder
of a controlling beneficial interest, or in any other capacity, engage in any
business or ventures that engages directly or indirectly in competition with the
business of Callaway Golf or its affiliates as of the date of this Agreement.
For purposes of this Section, an ownership interest in the stock of a publicly
traded company or a broadly based mutual fund shall not be prohibited.
10. Non-Solicitation. During the Term and any Extended Terms of this
----------------
Agreement, Consultant agrees not to ask or encourage directly or indirectly any
employees or consultants of Callaway Golf, or any of its affiliates, to leave
their employment with or refrain from providing services to Callaway Golf, or
any of its affiliates. Consultant shall make any subsequent employer aware of
this non-solicitation obligation.
11. Conflict of Interest. During the Term and any Extended Terms of this
--------------------
Agreement, Consultant shall not engage in any conduct or enterprise that shall
constitute an actual or apparent conflict of interest with respect to
Consultant's duties and obligations to Callaway Golf and/or its affiliates.
12. Confidential Information and/or Trade Secrets.
----------------------------------------------
(a) Definition. As used in this Agreement, the terms "Confidential
----------
Information and/or Trade Secrets" mean all information, whether written or oral,
not generally available to the public, regardless of whether it is suitable to
be patented, copyrighted and/or trademarked, which is owned by or in the
possession of Callaway Golf and/or its affiliates, including but not limited to
(1) concepts, ideas, plans and strategies involved in Callaway Golf's and/or its
affiliates' products and businesses, (2) the processes, formulae and techniques
disclosed by Callaway Golf and/or its affiliates or contractors to Consultant or
observed by Consultant, (3) the designs, inventions and innovations and related
plans, strategies and applications which Consultant develops during the Term or
any Extended Terms of this Agreement in connection with the projects assigned to
Consultant by Callaway Golf, and (4) third party information which Callaway Golf
and/or its affiliates has/have promised to keep confidential. The terms
"Confidential Information and/or Trade Secrets" do not include the following:
(i) Information which, at the time of disclosure or observation,
had been previously published or otherwise publicly disclosed;
(ii) Information which is published (or otherwise publicly
disclosed) after disclosure or observation, unless such publication is a breach
of this Agreement or is otherwise a violation of the contractual, legal or
fiduciary duties owed to Callaway Golf and/or
<PAGE>
its affiliates; or
(iii) Information which, subsequent to disclosure or observation,
is obtained by Consultant from a third person who is lawfully in possession of
such information (which information is not acquired in violation of any
contractual, legal, or fiduciary obligation owed to Callaway Golf and/or its
affiliates with respect to such information) and who is not required to refrain
from disclosing such information to others.
(b) No Disclosure of Confidential Information and/or Trade Secrets.
--------------------------------------------------------------
During the Term and any Extended Terms of this Agreement, Consultant will have
access to and become familiar with various Confidential Information and/or Trade
Secrets which Consultant acknowledges are owned and shall continue to be owned
solely by Callaway Golf and/or its affiliates or third party contractors.
Consultant agrees that Consultant will not, at any time, whether during or
subsequent to the Term and any Extended Terms of this Agreement, use any
Confidential Information and/or Trade Secrets for any purpose except in order
to: (1) perform Consultant's duties under this Agreement; (2) disclose
Confidential Information and/or Trade Secrets to third parties for which
Callaway Golf has given its written consent; or (3) disclose Confidential
Information and/or Trade Secrets pursuant to a governmental process in which
Consultant is compelled to do so. In the event Consultant believes that
Consultant is legally required to disclose any Confidential Information and/or
Trade Secrets, Consultant shall give reasonable notice to Callaway Golf prior to
disclosing such information and shall assist Callaway Golf in taking such
legally permissible steps as are reasonable and necessary to protect the
Confidential Information and/or Trade Secrets. If Consultant believes that it is
necessary for Consultant to disclose Confidential Information and/or Trade
Secrets, Consultant shall first obtain written consent to do so from Callaway
Golf, and the party to whom the disclosure is to be made shall execute a non-
disclosure agreement in a form acceptable to Callaway Golf before Consultant
shall make such disclosure.
(c) No Removal of Callaway Golf and/or its Affiliates' Documents or
---------------------------------------------------------------
Information. Consultant understands and agrees that all books, records,
- -----------
customer lists and documents connected with the business of Callaway Golf and/or
its affiliates are the property of and belong to Callaway Golf and/or its
affiliates or third-party contractors. Under no circumstances shall Consultant
remove from Callaway Golf's and/or its affiliates' facilities any of Callaway
Golf's and/or its affiliates' books, records, documents, lists or any copies of
the same without Callaway Golf's and/or its affiliates' written permission, nor
shall Consultant make any copies of Callaway Golf's and/or its affiliates'
books, records, documents or lists for use outside Callaway Golf's and/or its
affiliates' office(s) except as specifically authorized by Callaway Golf.
Consultant shall return to Callaway Golf and/or its affiliates all books,
records, documents and customer lists belonging to Callaway Golf and/or its
affiliates upon termination of this Agreement.
(d) The provisions of Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Consultant in
perpetuity.
13. Surrender of Company Property. Consultant agrees that upon
-----------------------------
termination of
<PAGE>
this Agreement in any manner, Consultant will immediately surrender to Callaway
Golf and/or its affiliates all property owned by Callaway Golf and/or its
affiliates.
14. Notices. Any notice, request, demand or other communication required
-------
or permitted hereunder shall be deemed properly given when actually received or
within five days of mailing by certified or registered mail, postage prepaid, to
the following addresses, or to such addresses as may be furnished from time to
time, in writing, to the other party:
Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Ely Callaway, Chairman
Consultant: Donald H. Dye
P.O. Box 675870
Rancho Santa Fe, California 92061-6375
15. Termination.
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(a) This Agreement may be terminated by Callaway Golf for substantial
cause upon the occurrence of any of the following events:
(i) Death. This Agreement may be terminated upon the death of
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Consultant. Termination under this sub-section shall be effective on the date
of Consultant's death.
(ii) Permanent Disability. This Agreement may be terminated
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upon the permanent disability of Consultant. For purposes of this Agreement, and
subject to all applicable laws with respect to disabilities and the rights of
those who are disabled, "permanent disability" shall mean the inability of
Consultant, by reason of any ailment or illness, or physical or mental
condition, to perform his duties hereunder for a consecutive period of six (6)
months.
(iii) Failure to Substantially Perform Duties or Misconduct.
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This Agreement may be terminated for breach of this Agreement, or misconduct
associated with the performance of Consultant's duties as a consultant,
including, but not limited to, dishonesty, theft, disloyalty and/or felony
criminal conduct. Termination under this subsection shall be effective
immediately, upon the receipt by Consultant of written notice stating the cause
of such termination.
(b) This Agreement may be terminated by Consultant upon the occurrence
of a Change in Control as defined herein. Such a termination by Consultant must
occur with ninety (90) days following a Change in Control, pursuant to
Consultant providing Callaway Golf with written notice of termination. Upon
termination of this Agreement by Consultant pursuant to this section, Consultant
shall be entitled to any compensation accrued and not yet
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paid for services rendered, reimbursement for accrued expenses as provided in
section 5(a), and no other severance. A "Change in Control" means the following
and shall be deemed to occur if any of the following events occurs:
(i) Any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding Callaway Golf and its subsidiaries and any employee benefit or stock
ownership plan of Callaway Golf or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired Callaway Golf's
securities solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of Callaway Golf's then outstanding securities entitled to
vote generally in the election of directors; or
(ii) Individuals who, as of the effective date hereof, constitute
the Board of Directors of Callaway Golf (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of Callaway
Golf, provided that any individual who becomes a director after the effective
date hereof whose election, or nomination for election by Callaway Golf's
shareholders, is approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered to be a member of the
Incumbent Board unless that individual was nominated or elected by any Person
having the power to exercise, through beneficial ownership, voting agreement
and/or proxy, 20% or more of either the outstanding shares of Common Stock or
the combined voting power of Callaway Golf's then outstanding voting securities
entitled to vote generally in the election of directors, in which case that
individual shall not be considered to be a member of the Incumbent Board unless
such individual's election or nomination for election by Callaway Golf's
shareholders is approved by a vote of at least two-thirds of the directors then
comprising the Incumbent Board; or
(iii) Consummation by Callaway Golf of the sale or other
disposition by Callaway Golf of all or substantially all of Callaway Golf's
assets or a reorganization or merger or consolidation of Callaway Golf with any
other person, entity or corporation, other than (1) a reorganization or merger
or consolidation that would result in the voting securities of Callaway Golf
outstanding immediately prior thereto (or, in the case of a reorganization or
merger or consolidation that is preceded or accomplished by an acquisition or
series of related acquisitions by any Person, by tender or exchange offer or
otherwise, of voting securities representing 5% or more of the combined voting
power of all securities of Callaway Golf, immediately prior to such acquisition
or the first acquisition in such series of acquisitions) continuing to
represent, either by remaining outstanding or by being converted into voting
securities of another entity, more than 50% of the combined voting power of the
voting securities of Callaway Golf or such other entity outstanding immediately
after such reorganization or merger or consolidation (or series of related
transactions involving such a reorganization or merger or consolidation), or (2)
a reorganization or merger or consolidation effected to implement a
recapitalization or reincorporation of Callaway Golf (or similar
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transaction) that does not result in a material change in beneficial ownership
of the voting securities of Callaway Golf or its successor; or
(iv) Approval by the shareholders of Callaway Golf or an order by
a court of competent jurisdiction of a plan of liquidation of Callaway Golf.
16. Advertising Waiver. Consultant agrees to permit Callaway Golf and/or
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its affiliates, and persons or other organizations authorized by Callaway Golf
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of Callaway Golf and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Consultant's name and/or pictures of Consultant taken in the course of
Consultant's provision of services to Callaway Golf and/or its affiliates,
appear. Consultant hereby waives and releases any claim or right Consultant may
otherwise have arising out of such use, publication or distribution.
17. Publicity; Use of Marks. Consultant shall not at any time use
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Callaway Golf's or its affiliates' names, trademarks or trade names in any
advertising or publicity without the prior written consent of Callaway Golf.
18. Assignment. Consultant shall not assign this Agreement or any of
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Consultant's rights hereunder without the prior written consent of Callaway
Golf. It is understood that this is a contract for the personal services of
Consultant. Any attempted assignment by Consultant in violation of this
paragraph shall be void.
19. IRREVOCABLE ARBITRATION OF DISPUTES.
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(a) CONSULTANT AND CALLAWAY GOLF AGREE THAT ANY DISPUTE, CONTROVERSY
OR CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS AGREEMENT, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO CONSULTANT'S
PROVISION OF SERVICES TO CALLAWAY GOLF, OR THE TERMINATION THEREOF, THAT CANNOT
BE RESOLVED BY MUTUAL AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING
ARBITRATION. THIS INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF
FEDERAL, STATE AND/OR LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF
DUTY ARISING IN CONTRACT OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF
COVENANT OF GOOD FAITH AND FAIR DEALING, VIOLATION OF PUBLIC POLICY, AND
VIOLATION OF ANY STATUTORY, CONTRACTUAL OR COMMON LAW RIGHTS. THE PARTIES AGREE
THAT ARBITRATION IS THE PARTIES' ONLY RECOURSE FOR SUCH CLAIMS AND HEREBY WAIVE
THE RIGHT TO PURSUE SUCH CLAIMS IN ANY OTHER FORUM, UNLESS OTHERWISE PROVIDED BY
LAW. A PROCEEDING TO COMPEL ARBITRATION UNDER THIS PROVISION SHALL BE GOVERNED
BY SECTION 3 OF CHAPTER 1 OF THE FEDERAL ARBITRATION ACT SUCH THAT ANY COURT
ACTION INVOLVING A DISPUTE WHICH IS NOT SUBJECT TO ARBITRATION SHALL BE STAYED
PENDING ARBITRATION OF ANY ARBITRABLE DISPUTE.
(b) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE MADE TO
THE CHIEF LEGAL OFFICER WITHIN ONE (1) YEAR, OR, IF LATER, WITHIN THE TIME
PERIOD STATED IN THE APPLICABLE STATUTE OF LIMITATIONS, WHICHEVER IS SHORTER,
AFTER THE DISCOVERY OF THE ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED
PARTY.
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(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL
RULES STATED IN THE COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION
("AAA") IN SAN DIEGO, CALIFORNIA. THE ARBITRATION SHALL BE CONDUCTED IN SAN
DIEGO BY A FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE
IN COMMERCIAL DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE AREA OF
DISPUTE, WHO SHALL HAVE THE POWER TO HEAR MOTIONS, CONTROL DISCOVERY, CONDUCT
HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER. THE
PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE ON
THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE COMMERCIAL RULES OF THE
AMERICAN ARBITRATION ASSOCIATION IN SAN DIEGO, CALIFORNIA.
(d) THE ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE
ENTERED AS A JUDGMENT IN ANY COURT HAVING COMPETENT JURISDICTION. IT IS
EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN ARBITRATION TO AVOID THE
BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND THE ARBITRATOR IS
EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING DISCOVERY AND ANY
HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME, BURDEN AND PUBLICITY
OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN PARTICULAR, THE
PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY CONTROLLING THE
AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF DEPOSITIONS OR
INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY TO ONLY THOSE MATTERS
CLEARLY RELEVANT TO THE DISPUTE.
(e) THE ARBITRATOR HAS NO AUTHORITY TO AWARD PUNITIVE DAMAGES.
(f) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION, INCLUDING WITNESS FEES AND EXPERT WITNESS FEES,
UNLESS THE ARBITRATOR FOR GOOD CAUSE DETERMINES OTHERWISE.
THE PARTIES HAVE READ SECTION 19 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE
IDENTIFIED ABOVE. _______ (CONSULTANT'S INITIALS) ______ (INITIALED ON BEHALF
OF CALLAWAY GOLF)
20. Disclosure of Others' Confidential Information. It is the
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understanding of both Callaway Golf and Consultant that Consultant shall not
divulge to Callaway Golf, its affiliates or its third party contractors any
confidential information or trade secrets belonging to others, nor shall
Callaway Golf seek to elicit from Consultant any such information. Consistent
with the foregoing, Consultant shall not provide to Callaway Golf, and Callaway
Golf shall not request, any documents or copies of documents containing such
information. Failure to comply with this obligation by Consultant shall be
grounds for immediate termination of this Agreement.
21. Applicable Law. This Agreement shall constitute a contract under the
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internal laws of the State of California and shall be governed in accordance
with the laws of said state as to both interpretation and performance.
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22. Entire Agreement/Amendments. This Agreement and the Termination
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Agreement reflect the entire agreement between the parties relating in any way
to the subject matter hereof. No statement or promise or different
representations have been made which in any way form a part of or modify this
Agreement. No amendment or modification shall be valid unless in writing and
signed by the parties hereto.
23. Separate Terms. Each term, condition, covenant or provision of this
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Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue in full
force and effect.
24. Waiver. A waiver by either party of a breach of any provision or
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provisions of this Agreement shall not constitute a general waiver or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provisions in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date(s) set forth below to be effective as of the day and
year first set forth above.
CALLAWAY GOLF CONSULTANT
Callaway Golf Company,
a California corporation
By:_______________________________ ___________________________________
Ely Callaway Donald H. Dye
Chairman
Dated:____________________________ Dated: ____________________________
<PAGE>
EXHIBIT 10.10.2
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of October 16,
1998, between Callaway Golf Company ("Callaway Golf"), a California corporation,
and Donald H. Dye ("Consultant").
Recitals
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A. Callaway Golf is in the business of designing, manufacturing and
selling golf clubs and related products using trade secrets, patented procedures
and other proprietary information. Callaway Golf is currently marketing its
products in the United States of America and internationally.
B. Consultant has been a long-time employee of Callaway Golf with
expertise in various areas relating to Callaway Golf's business.
C. Callaway Golf desires to retain access to the services and expertise of
Consultant and believes that the experience and expertise of Consultant will be
of benefit to Callaway Golf; therefore, Callaway Golf desires to enter into this
Agreement with Consultant.
D. Consultant wishes to assist Callaway Golf in its business; therefore,
Consultant desires to enter into this Agreement with Callaway Golf.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. Engagement. Pursuant to the terms of the Agreement between Consultant
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and Callaway Golf dated October 15, 1998 relating to Consultant's termination as
an employee (the "Termination Agreement"), Callaway Golf hereby engages the
services of Consultant as a consultant, and Consultant hereby accepts such
engagement, subject to the terms and conditions of this Agreement.
2. Term/Termination. The term ("Term") of this Agreement shall commence
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on October 16, 1998, and shall continue until December 31, 2001, unless
terminated in accordance with section 15 herein, or extended for the Extended
Terms as provided in Section 7. Consultant understands and agrees that the
provisions of sections 4, 12, and 19 of this Agreement shall survive termination
of the other provisions of this Agreement.
3. Services to be Performed by Consultant. During the Term and any
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Extended Terms of this Agreement, Consultant shall provide consulting services,
within his expertise, on matters related to the business of Callaway Golf as may
be requested by Ely Callaway, his successor, or his express designee from time
to time. Consultant shall maintain contact with Callaway Golf through Mr.
Callaway, or such person or persons as may be designated by Mr. Callaway from
time to time. Consultant represents that Consultant has the qualifications and
<PAGE>
ability to perform the services, within his expertise, in a professional manner
without the advice, control, or supervision of Callaway Golf. While the
specific methods and manner of providing the services shall be solely determined
by Consultant, Callaway Golf shall have the right to oversee, direct and give
advice to Consultant regarding the general extent, nature and scope of services
to be performed by Consultant under this Agreement. The services shall be
provided by Consultant at such times and in such locations as Callaway Golf and
Consultant mutually agree upon from time to time. Consultant will not be
required to provide more than one hundred (100) hours of service per year
without additional compensation. Any additional hours shall be compensated at
the rate of $350 per hour. If required, Callaway Golf shall, at no cost to
Consultant, provide Consultant with office space, secretarial assistance, and
such other equipment or assistance necessary for Consultant to provide the
consulting services requested. Callaway Golf shall approve any such expenses in
advance, and in writing.
4. Assignment of Rights.
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(a) Callaway Golf shall own all deliverables delivered by Consultant
hereunder.
(b) As used in this Agreement, "Inventions," whether or not they have
been patented, trademarked, or copyrighted, means designs, inventions,
technologies, methods, innovations, ideas, improvements, processes, materials,
sources of and uses for materials, apparatus, plans, systems and computer
programs relating to the design, manufacture, use, marketing, distribution and
management of Callaway Golf's and/or its affiliates' products.
(c) All works of authorship produced under this Agreement shall be
"works for hire" produced exclusively for Callaway Golf, and all rights thereto
shall belong to Callaway Golf. As a material part of the terms and
understandings of this Agreement, Consultant hereby assigns to Callaway Golf all
works of authorship and all Inventions relating to the business of Callaway Golf
and/or its affiliates, and all intellectual property rights therein (including
without limitation all patent rights, copyrights, and trade secret rights),
which Consultant creates, develops, conceives and/or reduces to practice, either
alone or with anyone else, during the course of providing the Services under
this Agreement, regardless of whether they are suitable to be patented,
trademarked and/or copyrighted.
(d) Consultant agrees to disclose to the President and Chief Executive
Officer of Callaway Golf any work of authorship and/or Invention relating to the
business of Callaway Golf and/or its affiliates, which Consultant develops,
conceives and/or reduces to practice, either alone or with anyone else, during
the Term and any Extended Terms of this Agreement. Consultant shall make a
limited disclosure of such works of authorship and/or Inventions to Callaway
Golf, even if Consultant does not believe that Consultant is required under this
Agreement to assign Consultant's interest in such work of authorship and/or
Invention to Callaway Golf. Callaway Golf agrees to keep such information as
confidential information. If Callaway Golf and Consultant disagree as to
whether or not a work of authorship and/or an Invention is included within the
terms of this Agreement, it will be the responsibility of Consultant to prove
that it is not included and/or that assignment to Callaway
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Golf is not required.
(e) The obligation to assign as provided in this Agreement does not
apply to any work of authorship or any Invention to the extent such obligation
would conflict with any applicable state or federal law. All provisions of this
Agreement relating to the assignment by Consultant of works of authorship and
Inventions are subject to the provisions of California Labor Code Sections 2870,
2871 and 2872.
(f) Upon Callaway Golf's request, at no expense to Consultant,
Consultant shall execute any and all proper applications for patents, copyrights
and/or trademarks, assignments to Callaway Golf, and all other applicable
documents, and will give testimony when and where requested to perfect the
title, copyrights, trademarks and/or patents (both within and without the United
States) in all works of authorship and Inventions assigned to Callaway Golf
hereunder.
(g) Consultant agrees that if in the course of performing the
consulting services, Consultant incorporates any other Invention owned by
Consultant or for which Consultant has the right to grant the rights granted in
this Section 4(g) ("Consultant Inventions"), into any report, presentation,
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recommendation, process, method, tooling, design, machine, equipment, product or
other item recommended, presented, developed, implemented or specified by
Consultant for or to Callaway Golf under this Agreement, Consultant hereby
grants to Callaway Golf a nonexclusive, transferable, royalty-free, perpetual,
irrevocable, worldwide license under said Consultant Invention to make, have
made, import, modify, and use any product or other item embodying or using said
Consultant Invention. Consultant will provide to Callaway Golf copies of all
patents and patent applications related to all such Consultant Inventions.
(h) Consultant agrees that if in the course of performing the
services, Consultant recommends the use of any third party Inventions which, to
the knowledge of Consultant, are or may be covered by patents held by third
parties, that Consultant will disclose such information to Callaway Golf.
5. Other Compensation. In addition to any compensation paid to Consultant
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pursuant to sections 3 or 7 of this Agreement, Callaway Golf agrees to pay
Consultant as follows:
(a) During the Term and any Extended Terms, Callaway Golf shall
reimburse Consultant for all reasonable, customary and necessary expenses for
travel and lodging incurred in the performance of the services to be provided
hereunder. Consultant shall account for such expenses by submitting a signed
statement itemizing such expenses prepared in accordance with the policies set
by Callaway Golf for reimbursement of such expenses. The amount, nature and
extent of such expenses shall always be subject to the control, supervision and
direction of Callaway Golf.
(b) During any Extended Terms, Callaway Golf shall provide for
Consultant
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to participate in Callaway Golf's health insurance and disability insurance
plans as the same may be modified from time to time, and to receive, if
Consultant is insurable under usual underwriting standards and Consultant's
physical condition does not prevent Consultant from reasonably qualifying for
such insurance coverage, term life insurance coverage of Consultant's life,
payable to whomever the Consultant directs, in the face amount of $2,000,000.00,
such policies to be transferable to Consultant upon termination of this
Agreement without evidence of insurability. Callaway Golf shall also provide, at
its expense, for Consultant to participate annually in the Executive Health
Program at Scripp's Hospital. It is recognized that all or part of the expenses
associated with these benefits may be treated as taxable compensation to
Consultant, and that Callaway Golf shall not be responsible for any taxes that
may be due as a result.
(c) During the Term and any Extended Terms, Consultant shall be
allowed to purchase, in accordance with Callaway Golf's reasonable procedures,
golf equipment made by Callaway Golf and available generally to Callaway Golf's
customers at Callaway Golf's regular U.S. wholesale price so long as (i) such
golf equipment is for the personal use of Consultant or his immediate family, or
is to be provided by Consultant as a gift, and not in exchange for any
remuneration, services, barter, or other compensation, to another for the
other's personal use, and (ii) the total amount of such golf equipment purchases
by Consultant from Callaway Golf in any one calendar year does not exceed
$10,000.00.
6. Relationship of the Parties. Consultant enters into this Agreement as,
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and shall continue to be, an independent contractor. Under no circumstances
shall Consultant look to Callaway Golf as Consultant's employer, or as a
partner, agent, or principal. Except as otherwise specifically provided herein,
while Consultant is engaged as a Consultant pursuant to this Agreement, Callaway
Golf will not provide Consultant with benefits accorded to Callaway Golf
employees, regardless of whether Consultant is later re-classified as an
employee of Callaway Golf, including but not limited to:
. Workers' compensation insurance;
. Access to any type of employee benefit plan, including but not
limited to Callaway Golf's 401(k) and employee stock purchase
plans;
. Vacation leave and/or sick pay.
7. Extended Terms. At Callaway Golf's option, this Agreement may be
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extended for up to two (2) one-year Extended Terms for the calendar years 2002
and 2003. If Callaway Golf so elects, then Callaway Golf shall compensate
Consultant during any such Extended Term at the rate of $200,000.00 per year,
payable in equal monthly installments. Except as otherwise provided, the terms
and conditions of this Agreement shall continue to define the relationship
between Callaway Golf and Consultant, including the obligation of Callaway Golf
to pay Consultant additional compensation for hours of service beyond one
hundred (100) hours per year at the rate of $350 per hour.
8. Extent of Authority. Consultant shall have no authority or right to
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commit or bind Callaway Golf and/or its affiliates to any agreement or
arrangement or to obligate
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Callaway Golf and/or its affiliates in any manner.
9. Exclusive Dealings. During the Term and any Extended Terms of this
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Agreement, to the fullest extent permitted by law, Consultant agrees that he
will not, directly or indirectly, whether as agent, consultant, attorney, holder
of a controlling beneficial interest, or in any other capacity, engage in any
business or ventures that engages directly or indirectly in competition with the
business of Callaway Golf or its affiliates as of the date of this Agreement.
For purposes of this Section, an ownership interest in the stock of a publicly
traded company or a broadly based mutual fund shall not be prohibited.
10. Non-Solicitation. During the Term and any Extended Terms of this
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Agreement, Consultant agrees not to ask or encourage directly or indirectly any
employees or consultants of Callaway Golf, or any of its affiliates, to leave
their employment with or refrain from providing services to Callaway Golf, or
any of its affiliates. Consultant shall make any subsequent employer aware of
this non-solicitation obligation.
11. Conflict of Interest. During the Term and any Extended Terms of this
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Agreement, Consultant shall not engage in any conduct or enterprise that shall
constitute an actual or apparent conflict of interest with respect to
Consultant's duties and obligations to Callaway Golf and/or its affiliates.
12. Confidential Information and/or Trade Secrets.
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(a) Definition. As used in this Agreement, the terms "Confidential
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Information and/or Trade Secrets" mean all information, whether written or oral,
not generally available to the public, regardless of whether it is suitable to
be patented, copyrighted and/or trademarked, which is owned by or in the
possession of Callaway Golf and/or its affiliates, including but not limited to
(1) concepts, ideas, plans and strategies involved in Callaway Golf's and/or its
affiliates' products and businesses, (2) the processes, formulae and techniques
disclosed by Callaway Golf and/or its affiliates or contractors to Consultant or
observed by Consultant, (3) the designs, inventions and innovations and related
plans, strategies and applications which Consultant develops during the Term or
any Extended Terms of this Agreement in connection with the projects assigned to
Consultant by Callaway Golf, and (4) third party information which Callaway Golf
and/or its affiliates has/have promised to keep confidential. The terms
"Confidential Information and/or Trade Secrets" do not include the following:
(i) Information which, at the time of disclosure or
observation, had been previously published or otherwise publicly disclosed;
(ii) Information which is published (or otherwise publicly
disclosed) after disclosure or observation, unless such publication is a breach
of this Agreement or is otherwise a violation of the contractual, legal or
fiduciary duties owed to Callaway Golf and/or its affiliates; or
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<PAGE>
(iii) Information which, subsequent to disclosure or observation,
is obtained by Consultant from a third person who is lawfully in possession of
such information (which information is not acquired in violation of any
contractual, legal, or fiduciary obligation owed to Callaway Golf and/or its
affiliates with respect to such information) and who is not required to refrain
from disclosing such information to others.
(b) No Disclosure of Confidential Information and/or Trade Secrets.
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During the Term and any Extended Terms of this Agreement, Consultant will have
access to and become familiar with various Confidential Information and/or Trade
Secrets which Consultant acknowledges are owned and shall continue to be owned
solely by Callaway Golf and/or its affiliates or third party contractors.
Consultant agrees that Consultant will not, at any time, whether during or
subsequent to the Term and any Extended Terms of this Agreement, use any
Confidential Information and/or Trade Secrets for any purpose except in order
to: (1) perform Consultant's duties under this Agreement; (2) disclose
Confidential Information and/or Trade Secrets to third parties for which
Callaway Golf has given its written consent; or (3) disclose Confidential
Information and/or Trade Secrets pursuant to a governmental process in which
Consultant is compelled to do so. In the event Consultant believes that
Consultant is legally required to disclose any Confidential Information and/or
Trade Secrets, Consultant shall give reasonable notice to Callaway Golf prior to
disclosing such information and shall assist Callaway Golf in taking such
legally permissible steps as are reasonable and necessary to protect the
Confidential Information and/or Trade Secrets. If Consultant believes that it is
necessary for Consultant to disclose Confidential Information and/or Trade
Secrets, Consultant shall first obtain written consent to do so from Callaway
Golf, and the party to whom the disclosure is to be made shall execute a non-
disclosure agreement in a form acceptable to Callaway Golf before Consultant
shall make such disclosure.
(c) No Removal of Callaway Golf and/or its Affiliates' Documents or
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Information. Consultant understands and agrees that all books, records,
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customer lists and documents connected with the business of Callaway Golf and/or
its affiliates are the property of and belong to Callaway Golf and/or its
affiliates or third-party contractors. Under no circumstances shall Consultant
remove from Callaway Golf's and/or its affiliates' facilities any of Callaway
Golf's and/or its affiliates' books, records, documents, lists or any copies of
the same without Callaway Golf's and/or its affiliates' written permission, nor
shall Consultant make any copies of Callaway Golf's and/or its affiliates'
books, records, documents or lists for use outside Callaway Golf's and/or its
affiliates' office(s) except as specifically authorized by Callaway Golf.
Consultant shall return to Callaway Golf and/or its affiliates all books,
records, documents and customer lists belonging to Callaway Golf and/or its
affiliates upon termination of this Agreement.
(d) The provisions of Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Consultant in
perpetuity.
13. Surrender of Company Property. Consultant agrees that upon
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termination of this Agreement in any manner, Consultant will immediately
surrender to Callaway Golf and/or its affiliates all property owned by Callaway
Golf and/or its affiliates.
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14. Notices. Any notice, request, demand or other communication required
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or permitted hereunder shall be deemed properly given when actually received or
within five days of mailing by certified or registered mail, postage prepaid, to
the following addresses, or to such addresses as may be furnished from time to
time, in writing, to the other party:
Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Ely Callaway, Chairman
Consultant: Donald H. Dye
P.O. Box 675870
Rancho Santa Fe, California 92061-6375
15. Termination.
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(a) This Agreement may be terminated by Callaway Golf for substantial
cause upon the occurrence of any of the following events:
(i) Death. This Agreement may be terminated upon the death of
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Consultant. Termination under this sub-section shall be effective on the date
of Consultant's death.
(ii) Permanent Disability. This Agreement may be terminated
--------------------
upon the permanent disability of Consultant. For purposes of this Agreement, and
subject to all applicable laws with respect to disabilities and the rights of
those who are disabled, "permanent disability" shall mean the inability of
Consultant, by reason of any ailment or illness, or physical or mental
condition, to perform his duties hereunder for a consecutive period of six (6)
months.
(iii) Failure to Substantially Perform Duties or Misconduct.
-----------------------------------------------------
This Agreement may be terminated for breach of this Agreement, or misconduct
associated with the performance of Consultant's duties as a consultant,
including, but not limited to, dishonesty, theft, disloyalty and/or felony
criminal conduct. Termination under this subsection shall be effective
immediately, upon the receipt by Consultant of written notice stating the cause
of such termination.
(b) This Agreement may be terminated by Consultant upon the occurrence
of a Change in Control as defined herein. Such a termination by Consultant must
occur with ninety (90) days following a Change in Control, pursuant to
Consultant providing Callaway Golf with written notice of termination. Upon
termination of this Agreement by Consultant pursuant to this section, Consultant
shall be entitled to any compensation accrued and not yet paid for services
rendered, reimbursement for accrued expenses as provided in section 5(a), and no
other severance. A "Change in Control" means the following and shall be deemed
to
7
<PAGE>
occur if any of the following events occurs:
(i) Any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding Callaway Golf and its subsidiaries and any employee benefit or stock
ownership plan of Callaway Golf or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired Callaway Golf's
securities solely in connection with a public offering thereof (such person,
entity or group being referred to herein as a "Person") becomes the beneficial
owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
30% or more of either the then outstanding shares of Common Stock or the
combined voting power of Callaway Golf's then outstanding securities entitled to
vote generally in the election of directors; or
(ii) Individuals who, as of the effective date hereof, constitute
the Board of Directors of Callaway Golf (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of Directors of Callaway
Golf, provided that any individual who becomes a director after the effective
date hereof whose election, or nomination for election by Callaway Golf's
shareholders, is approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered to be a member of the
Incumbent Board unless that individual was nominated or elected by any Person
having the power to exercise, through beneficial ownership, voting agreement
and/or proxy, 20% or more of either the outstanding shares of Common Stock or
the combined voting power of Callaway Golf's then outstanding voting securities
entitled to vote generally in the election of directors, in which case that
individual shall not be considered to be a member of the Incumbent Board unless
such individual's election or nomination for election by Callaway Golf's
shareholders is approved by a vote of at least two-thirds of the directors then
comprising the Incumbent Board; or
(iii) Consummation by Callaway Golf of the sale or other
disposition by Callaway Golf of all or substantially all of Callaway Golf's
assets or a reorganization or merger or consolidation of Callaway Golf with any
other person, entity or corporation, other than (1) a reorganization or merger
or consolidation that would result in the voting securities of Callaway Golf
outstanding immediately prior thereto (or, in the case of a reorganization or
merger or consolidation that is preceded or accomplished by an acquisition or
series of related acquisitions by any Person, by tender or exchange offer or
otherwise, of voting securities representing 5% or more of the combined voting
power of all securities of Callaway Golf, immediately prior to such acquisition
or the first acquisition in such series of acquisitions) continuing to
represent, either by remaining outstanding or by being converted into voting
securities of another entity, more than 50% of the combined voting power of the
voting securities of Callaway Golf or such other entity outstanding immediately
after such reorganization or merger or consolidation (or series of related
transactions involving such a reorganization or merger or consolidation), or (2)
a reorganization or merger or consolidation effected to implement a
recapitalization or reincorporation of Callaway Golf (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of Callaway Golf or its successor; or
8
<PAGE>
(iv) Approval by the shareholders of Callaway Golf or an order by
a court of competent jurisdiction of a plan of liquidation of Callaway Golf.
16. Advertising Waiver. Consultant agrees to permit Callaway Golf and/or
------------------
its affiliates, and persons or other organizations authorized by Callaway Golf
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of Callaway Golf and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Consultant's name and/or pictures of Consultant taken in the course of
Consultant's provision of services to Callaway Golf and/or its affiliates,
appear. Consultant hereby waives and releases any claim or right Consultant may
otherwise have arising out of such use, publication or distribution.
17. Publicity; Use of Marks. Consultant shall not at any time use
-----------------------
Callaway Golf's or its affiliates' names, trademarks or trade names in any
advertising or publicity without the prior written consent of Callaway Golf.
18. Assignment. Consultant shall not assign this Agreement or any of
----------
Consultant's rights hereunder without the prior written consent of Callaway
Golf. It is understood that this is a contract for the personal services of
Consultant. Any attempted assignment by Consultant in violation of this
paragraph shall be void.
19. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) CONSULTANT AND CALLAWAY GOLF AGREE THAT ANY DISPUTE, CONTROVERSY
OR CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS AGREEMENT, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO CONSULTANT'S
PROVISION OF SERVICES TO CALLAWAY GOLF, OR THE TERMINATION THEREOF, THAT CANNOT
BE RESOLVED BY MUTUAL AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING
ARBITRATION. THIS INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF
FEDERAL, STATE AND/OR LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF
DUTY ARISING IN CONTRACT OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF
COVENANT OF GOOD FAITH AND FAIR DEALING, VIOLATION OF PUBLIC POLICY, AND
VIOLATION OF ANY STATUTORY, CONTRACTUAL OR COMMON LAW RIGHTS. THE PARTIES AGREE
THAT ARBITRATION IS THE PARTIES' ONLY RECOURSE FOR SUCH CLAIMS AND HEREBY WAIVE
THE RIGHT TO PURSUE SUCH CLAIMS IN ANY OTHER FORUM, UNLESS OTHERWISE PROVIDED BY
LAW. A PROCEEDING TO COMPEL ARBITRATION UNDER THIS PROVISION SHALL BE GOVERNED
BY SECTION 3 OF CHAPTER 1 OF THE FEDERAL ARBITRATION ACT SUCH THAT ANY COURT
ACTION INVOLVING A DISPUTE WHICH IS NOT SUBJECT TO ARBITRATION SHALL BE STAYED
PENDING ARBITRATION OF ANY ARBITRABLE DISPUTE.
(b) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE MADE TO
THE CHIEF LEGAL OFFICER WITHIN ONE (1) YEAR, OR, IF LATER, WITHIN THE TIME
PERIOD STATED IN THE APPLICABLE STATUTE OF LIMITATIONS, WHICHEVER IS SHORTER,
AFTER THE DISCOVERY OF THE ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED
PARTY.
(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL
RULES
9
<PAGE>
STATED IN THE COMMERCIAL RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA")
IN SAN DIEGO, CALIFORNIA. THE ARBITRATION SHALL BE CONDUCTED IN SAN DIEGO BY A
FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE IN
COMMERCIAL DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE AREA OF
DISPUTE, WHO SHALL HAVE THE POWER TO HEAR MOTIONS, CONTROL DISCOVERY, CONDUCT
HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER. THE
PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE ON
THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE COMMERCIAL RULES OF THE
AMERICAN ARBITRATION ASSOCIATION IN SAN DIEGO, CALIFORNIA.
(d) THE ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE
ENTERED AS A JUDGMENT IN ANY COURT HAVING COMPETENT JURISDICTION. IT IS
EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN ARBITRATION TO AVOID THE
BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND THE ARBITRATOR IS
EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING DISCOVERY AND ANY
HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME, BURDEN AND PUBLICITY
OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN PARTICULAR, THE
PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY CONTROLLING THE
AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF DEPOSITIONS OR
INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY TO ONLY THOSE MATTERS
CLEARLY RELEVANT TO THE DISPUTE.
(e) THE ARBITRATOR HAS NO AUTHORITY TO AWARD PUNITIVE DAMAGES.
(f) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION, INCLUDING WITNESS FEES AND EXPERT WITNESS FEES,
UNLESS THE ARBITRATOR FOR GOOD CAUSE DETERMINES OTHERWISE.
THE PARTIES HAVE READ SECTION 19 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE
IDENTIFIED ABOVE. _______ (CONSULTANT'S INITIALS) ______ (INITIALED ON BEHALF
OF CALLAWAY GOLF)
20. Disclosure of Others' Confidential Information. It is the
----------------------------------------------
understanding of both Callaway Golf and Consultant that Consultant shall not
divulge to Callaway Golf, its affiliates or its third party contractors any
confidential information or trade secrets belonging to others, nor shall
Callaway Golf seek to elicit from Consultant any such information. Consistent
with the foregoing, Consultant shall not provide to Callaway Golf, and Callaway
Golf shall not request, any documents or copies of documents containing such
information. Failure to comply with this obligation by Consultant shall be
grounds for immediate termination of this Agreement.
21. Applicable Law. This Agreement shall constitute a contract under the
--------------
internal laws of the State of California and shall be governed in accordance
with the laws of said state as to both interpretation and performance.
22. Entire Agreement/Amendments. This Agreement and the Termination
---------------------------
Agreement reflect the entire agreement between the parties relating in any way
to the subject
10
<PAGE>
matter hereof. No statement or promise or different representations have been
made which in any way form a part of or modify this Agreement. No amendment or
modification shall be valid unless in writing and signed by the parties hereto.
23. Separate Terms. Each term, condition, covenant or provision of this
--------------
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue in full
force and effect.
24. Waiver. A waiver by either party of a breach of any provision or
------
provisions of this Agreement shall not constitute a general waiver or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provisions in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date(s) set forth below to be effective as of the day and
year first set forth above.
CALLAWAY GOLF CONSULTANT
Callaway Golf Company,
a California corporation
By: /s/ Ely Callaway /s/ Donald H. Dye
------------------------------- -----------------------------------
Ely Callaway Donald H. Dye
Chairman
Dated:____________________________ Dated: ____________________________
11
<PAGE>
EXHIBIT 10.25
LOAN FORGIVENESS AGREEMENT
THIS LOAN FORGIVENESS AGREEMENT (this "Agreement") is effective as of March
8, 1999, by and among Callaway Golf Company, a California corporation
("Callaway Golf"), and Callaway Golf Media Ventures, LLC, a California limited
liability company ("CGMV"). Callaway Golf and CGMV are sometimes collectively
referred to herein as the "Parties" and individually as a "Party." Capitalized
Terms used herein and not otherwise defined shall have the same meaning given to
such terms in Section 7.
RECITALS
A. Callaway Editions, Inc. ("Editions"), a Delaware corporation, and
Callaway Golf are members of CGMV and have entered into an Operating Agreement
for CGMV, dated January 26, 1998 (the "Operating Agreement"). Callaway Golf
owns an 80% membership interest in CGMV and Editions owns a 20% membership
interest in CGMV. Nicholas Callaway ("Nicholas"), an individual, is the
principal shareholder of Editions.
B. Callaway Golf and Editions formed CGMV for the purpose of publishing
the Callaway Golf Guides, a multi-volume series of illustrated golf-related
books (the "Golf Guides").
C. On January 26, 1998, CGMV and Callaway Golf entered into a Loan and
Security Agreement for up to Twenty Million Dollars ($20,000,000.00) (the "Loan
Agreement"), evidencing a loan from Callaway Golf to CGMV. As of March 8, 1999,
there was outstanding under the CGMV Loan the principal amount plus accrued
interest of approximately Two Million One Hundred Forty-Eight Thousand Seven
Hundred Sixty-Four Dollars and Thirty-Nine Cents ($2,148,764.39) (the "Existing
Balance").
D. Callaway Golf desires to forgive CGMV from its liability to pay the
Existing Balance under the Loan Agreement, and CGMV desires to discharge
Callaway Golf from its obligation, if any, to provide continuing technical
support and advice to CGMV in connection with CGMV's publication of the Golf
Guides.
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
understandings herein contained, as well as for other good and valuable
consideration, acknowledged by each of them to be satisfactory and adequate, the
Parties hereby agree as follows:
1. Transaction.
-----------
1.1 Forgiveness of Existing Balance. Callaway Golf hereby forgives the
-------------------------------
Existing Balance.
<PAGE>
1.2 Discharge from Obligation. CGMV hereby discharges Callaway Golf
-------------------------
from any obligation to provide technical support and advice to CGMV in
connection with publication of the Golf Guides.
2. Deliveries.
----------
2.1 Deliveries by Callaway Golf. Callaway Golf has delivered the
---------------------------
following to Buyer:
2.1.1 Resolutions of Callaway Golf. Certified copies of the
----------------------------
resolutions duly adopted by Callaway Golf's board of directors authorizing the
execution, delivery and performance of this Agreement.
2.2 Deliveries by CGMV. CGMV has delivered the following to Callaway
------------------
Golf:
2.2.1 Resolutions. Certified copies of the resolutions duly
-----------
adopted by CGMV authorizing the execution, delivery and performance of this
Agreement.
3. Representations and Warranties of Callaway Golf. As a material
-----------------------------------------------
inducement to CGMV to enter into this Agreement, Callaway Golf hereby represents
and warrants to CGMV as follows:
3.1 Organization. Callaway Golf is a corporation duly organized,
------------
validly existing and in good standing under the laws of California and is
qualified to do business in every jurisdiction in which its ownership of
property or conduct of its business requires it to qualify as foreign
corporation. Callaway Golf has all necessary corporate powers and corporate
authority to carry on its business as now conducted presently and presently
proposed to be conducted and to execute, deliver and perform this Agreement and
any related agreements to which it is a party.
3.2 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement has been duly authorized, executed and delivered by Callaway
Golf. This Agreement constitutes a valid and binding obligation of Callaway
Golf, enforceable in accordance with its terms. The execution and delivery by
Callaway Golf of this Agreement and the fulfillment of and compliance with the
respective terms hereof and thereof by Callaway Golf do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under (whether with or without the passage of time,
the giving of notice or both), (iii) give any Person the right to modify,
terminate or accelerate any obligation under, (iv) result in a violation of, or
(v) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any Person or any court or
administrative or governmental body or agency pursuant to, the organizational
documents of Callaway Golf, or any material law, statute, rule or regulation to
which Callaway Golf is subject, or any agreement, instrument, order, judgment or
decree to which Callaway Golf is subject.
2
<PAGE>
4. Representations and Warranties of CGMV. As a material inducement to
--------------------------------------
Callaway Golf to enter into this Agreement and take the actions set forth in
Section 1, CGMV hereby represents and warrants to Callaway Golf as follows:
4.1 Organization, Power and Authority. CGMV is a duly organized,
---------------------------------
validly existing and in good standing under the laws of its jurisdiction of
organization. CGMV possesses all requisite power and authority necessary to
carry out the transactions contemplated by this Agreement.
4.2 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement has been duly authorized by CGMV. This Agreement constitutes a
valid and binding obligation of CGMV, enforceable in accordance with its terms.
The execution and delivery by CGMV of this Agreement and the fulfillment of and
compliance with the respective terms hereof and thereof by CGMV do not and shall
not (i) conflict with or result in a breach of the terms, conditions or
provisions of, (ii) constitute a default under (whether with or without the
passage of time, the giving of notice or both), (iii) give any third party the
right to modify, terminate or accelerate any obligation under, (iv) result in a
violation of, or (v) require any authorization, consent, approval, exemption or
other action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the organizational
documents of CGMV, or any material law, statute, rule or regulation to which
CGMV is subject, or any material agreement, instrument, order, judgment or
decree to which CGMV is subject.
5. Survival of Representations and Warranties. Notwithstanding any
------------------------------------------
investigation or inquiries made by the Parties, each party acknowledges and
agrees that it has entered into this Agreement in reliance upon the
representations and warranties by the other contained in this Agreement. The
representations and warranties shall survive the execution of this Agreement
indefinitely.
6. Further Assurances. If at any time after the execution of this
------------------
Agreement any further action is necessary or desirable to carry out the purposes
of this Agreement or the transactions contemplated hereby, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party may reasonably request,
all at the sole cost and expense of the requesting Party.
7. Definitions. For the purpose of this Agreement "Person" means an
-----------
individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
8. Miscellaneous.
-------------
8.1 Fees and Expenses. Each Party shall pay all of its own fees and
-----------------
expenses (including fees and expenses of legal counsel, accountants, investment
bankers and other
3
<PAGE>
representatives and consultants) in connection with this Agreement and the
consummation of the transactions contemplated hereby. Callaway Golf acknowledges
that it shall not seek reimbursement from CGMV for its fees and expenses
incurred in connection with the negotiation or preparation of this Agreement. If
any legal action or other proceeding relating to this Agreement, the agreements
contemplated hereby, the transactions contemplated hereby or thereby or the
enforcement of any provision of this Agreement or the agreements contemplated
hereby is brought against any Party, the prevailing Party in such action or
proceeding shall be entitled to recover all reasonable expenses relating thereto
(including attorneys' fees and expenses) from the Party against which such
action or proceeding is brought in addition to any other relief to which such
prevailing Party may be entitled.
8.2 Special Remedies and Enforcement. Each Party recognizes and agrees
--------------------------------
that a breach by one of the Parties ("Breaching Party"), of any of the covenants
set forth in this Agreement could cause irreparable harm to the other Parties,
that the Parties' remedies at law in the event of such breach would be
inadequate, and that, accordingly, in the event of any such breach a restraining
order or injunction or both may be issued against the Breaching Party in
addition to any other rights and remedies which are available to the Parties. If
this Section 8.2 is more restrictive than permitted by applicable law, this
Section 8.2 shall be limited to the extent required by such law.
8.3 Entire Agreement. Modifications. This Agreement, together with
-------------------------------
exhibits and schedules attached hereto, contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereby, and
contains all of the terms and conditions thereof and supersedes all prior
agreements and understandings relating to the subject matter hereof. No changes
or modifications of or additions to this Agreement shall be valid unless the
same shall be in writing and signed by each party hereto.
8.4 Waivers. No waiver of any of the provisions of this Agreement
-------
shall be deemed to be or shall constitute a waiver of any other provision of
this Agreement, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver of any provision of this Agreement shall be binding
on the parties hereto unless it is executed in writing by the party making the
waiver.
8.5 Successors and Assigns.
----------------------
8.5.1 This Agreement and all covenants and agreements contained
herein and rights, interests or obligations hereunder, by or on behalf of any of
the Parties hereto, shall bind and inure to the benefit of the respective
successors and assigns of the Parties hereto whether so expressed or not.
8.5.2 No Party may assign their rights or obligations under this
document. Any attempted assignment in violation of this Agreement shall be void
and of no effect.
4
<PAGE>
8.6 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any Person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law in any respect by a court of
competent jurisdiction, such provision shall be ineffective only to the extent
of such prohibition or illegality or unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
8.7 Counterparts. This Agreement may be executed simultaneously in
------------
counterparts (including by means of telecopied signature pages), any one of
which need not contain the signatures of more than one Party, but all such
counterparts taken together shall constitute one and the same Agreement.
8.8 Descriptive Heading; Interpretation. The headings and captions used
-----------------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. The use of the word
"including" herein shall mean "including without limitation." The Parties intend
that each representation, warranty and covenant contained herein shall have
independent significance. If any Party has breached any representation, warranty
or covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
8.9 No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the Parties and their permitted successors and assigns and nothing
herein expressed or implied shall give or be construed to give any Person, other
than the Parties and such permitted successors and assigns, any legal or
equitable rights hereunder.
8.10 Cooperation on Tax Matters. The Parties shall cooperate fully, as
--------------------------
and to the extent reasonably requested by each Party and at the requesting
Party's expense, in connection with any audit, litigation or other proceeding
with respect to Taxes. Such cooperation shall include the retention and (upon
any Party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Parties
agree (i) to retain all books and records with respect to Tax matters pertinent
to CGMV relating to any taxable period beginning before the effective date of
this Agreement until the expiration of the statute of limitations (and, to the
extent notified by any Party, any extensions thereof) applicable to such taxable
periods, and to abide by all record retention agreements entered into with any
taxing authority, and (ii) to give each Party reasonable written notice prior to
transferring, destroying or discarding any such books and records and, if any
Party so requests, the other party as the case may be, shall allow such party to
take possession of such books and records.
5
<PAGE>
8.11 Governing Law. This Agreement is made and shall be governed by,
-------------
and construed and enforced in accordance with, the internal laws of the State of
California, without regard to the conflict of laws principles thereof, as the
same apply to agreements executed solely by residents of California and wholly
to be performed within California.
8.12 Authority. Each of the persons executing this Agreement
---------
represents and warrants that it is authorized to execute this Agreement and the
entity on whose behalf they are signing is bound by the terms hereof.
8.13 Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, one day after being sent to the recipient by reputable overnight
courier service (charges prepaid), upon machine-generated acknowledgment of
receipt after transmittal by facsimile or five (5) days after being mailed to
the recipient by certified or registered mail, return receipt requested and
postage prepaid. Such notices, demands and other communications shall be sent to
the Parties at the addresses indicated below or to such other address or to the
attention of such other person as the recipient party has specified by prior
written notice to the sending party.
To Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: David A. Rane, Executive Vice President,
Administration and Planning, and Chief Financial
Officer
With a copy to: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Steven C. McCracken, Executive Vice President,
Licensing, Chief Legal Officer and Secretary
To CGMV: Callaway Editions, Inc.
70 Bedford Street
New York, New York 10014
Attn: Nicholas Callaway, President, and Editor-in-Chief
With a Copy to: Neale M. Albert, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
8.14 No Strict Construction. The Parties have participated jointly in
----------------------
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or
6
<PAGE>
interpretation arises, this Agreement shall be construed as if drafted jointly
by the Parties, and no presumption or burden of proof shall arise favoring or
disfavoring any Party by virtue of the authorship of any of the provisions of
this Agreement.
8.15 Incorporation of Recitals. The Recitals to this Agreement are
-------------------------
incorporated herein by this referenced with the same force and effect as if set
forth in full herein.
8.16 Brokers. No broker, finder, or investment banker is entitled to
-------
any brokerage, finder's, or other fee or commission in connection with the
transactions hereunder based upon arrangements made by or on behalf of any party
to this Agreement.
8.17 No Public Announcement. Except as otherwise required by law, no
----------------------
this Agreement shall make or cause to be made any public announcement or press
party to release with respect to the terms of this Agreement or the transactions
contemplated hereby without the prior written approval of the other party
hereto, which consent shall not be unreasonably withheld or delayed.
8.18 Good Faith. All parties hereto agree to carry out the terms of
----------
this Agreement and to act in good faith with respect to the terms and conditions
contained herein before and after the execution hereof.
8.19 Time is of the Essence. Time is of the essence in this Agreement,
----------------------
and all of the terms, covenants and conditions hereof.
8.20 Venue; Submission to Jurisdiction. Each of the Parties submits to
---------------------------------
the jurisdiction of any state or federal court sitting in San Diego County,
California, in any action or proceeding arising out of or relating to this
Agreement, agrees that all claims in respect of the action or proceeding may be
heard and determined in any such court, and agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the Parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto.
[The balance of this page is intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan Forgiveness
Agreement to be effective on March 8, 1999.
CGMV: CALLAWAY GOLF:
CALLAWAY GOLF MEDIA VENTURES, LLC, a CALLAWAY GOLF COMPANY, a California
California limited liability company corporation
By:CALLAWAY EDITIONS, INC., a Delaware
corporation, Member
By: /s/ David A. Rane
________________________________
David A. Rane, Executive Vice
By: /s/ Nicholas Callaway President,
________________________________ Administration and Planning, and Chief
Nicholas Callaway, President, and Financial Officer
Editor-in-Chief
By: CALLAWAY GOLF COMPANY, a
California corporation, Member
By: /s/ David A. Rane
________________________________
David A. Rane, Executive Vice
President, Administration and
Planning, and Chief Financial Officer
8
<PAGE>
EXHIBIT 10.26
MEMBERSHIP INTEREST PURCHASE AGREEMENT
THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT (this "Agreement") is effective
as of March 9, 1999, by and among Callaway Golf Company, a California
corporation ("Callaway Golf") and Callaway Editions, Inc., a Delaware
corporation ("Buyer"). Callaway Golf and Buyer are sometimes collectively
referred to herein as the "Parties" and individually as a "Party." Capitalized
terms used herein and not otherwise defined herein have the meaning given to
such terms in Section 6 below.
RECITALS
A. Buyer and Callaway Golf are members of Callaway Golf Media Ventures,
LLC, ("CGMV"), a California limited liability company, and have entered into an
operating agreement for CGMV dated January 26, 1998 (the "Operating Agreement").
Currently, Callaway Golf owns an 80% membership interest in CGMV and Buyer owns
a 20% membership interest in CGMV. Nicholas Callaway ("Nicholas"), an
individual, is the principal shareholder of Editions.
B. On January 26, 1998, CGMV and Callaway Golf entered into a Loan and
Security Agreement for up to Twenty Million Dollars ($20,000,000.00) (the "Loan
Agreement"), evidencing a loan from Callaway Golf to CGMV. As of March 8, 1999,
there was outstanding under the CGMV Loan the principal amount plus accrued
interest of approximately Two Million One Hundred Forty-Eight Thousand Seven
Hundred Sixty-Four Dollars and Thirty-Nine Cents ($2,148,764.39) ("Existing
Balance"). Callaway Golf and CGMV have previously entered into a Loan
Forgiveness Agreement effective March 8, 1999 (the "Loan Forgiveness Agreement")
forgiving the Existing Balance.
C. Buyer now desires to purchase Callaway Golf's membership interest in
CGMV and Callaway Golf is willing to sell its membership interest in CGMV upon
all the terms and conditions in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
understandings herein contained, as well as for other good and valuable
consideration, acknowledged by each of them to be satisfactory and adequate, the
Parties hereby agree as follows:
1. Transaction.
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1.1 Purchase of Membership Interest. Subject to the terms and
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conditions and in reliance on the representations and warranties set forth
herein, Callaway Golf hereby as of the effective date hereof sells, assigns,
transfers, and delivers its entire Eighty Percent (80%) membership interest (the
"Membership Interest") in CGMV to Buyer in return for the Purchase Price.
<PAGE>
1.2 Purchase Price. The total purchase price ("Purchase Price") to be
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paid by Buyer for the Membership Interest shall be one dollar ($1.00). The
Purchase Price has been paid.
1.3 Change of Name. The name of CGMV shall be changed to Callaway
--------------
Editions Media Ventures, LLC.
2. Deliveries.
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2.1 Deliveries by Callaway Golf. Callaway Golf has delivered the
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following to Buyer:
2.1.1 Resolutions of Callaway Golf. Certified copies of the
----------------------------
resolutions duly adopted by Callaway Golf's board of directors authorizing the
transfer of the Membership Interest and the execution, delivery and performance
of this Agreement and each of the other agreements contemplated hereby;
2.1.2 Resignation of Callaway Golf. A written resignation of the
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two (2) managers appointed by Callaway Golf as managers of CGMV.
2.1.3 Certificate of Amendment. An executed form LLC-2
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Certificate of Amendment signed by Callaway Golf as a member of CGMV changing
the name of CGMV to Callaway Editions Media Ventures, LLC.
2.1.4 Trademark License Agreement. An executed trademark license
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agreement (the "Trademark License Agreement") acceptable to CGMV granting CGMV
the right to use the name Callaway Golf.
2.2 Deliveries by Buyer. Buyer has delivered the following to
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Callaway Golf:
2.2.1 Purchase Price. The Purchase Price.
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2.2.2 Resolutions. Certified copies of the resolutions duly
-----------
adopted by Buyer's board of directors authorizing the execution, delivery and
performance of this Agreement and each of the other agreements contemplated
hereby.
2.2.3 Certificate of Amendment. An executed form LLC-2
------------------------
Certificate of Amendment signed by Buyer as a member of CGMV changing the name
of CGMV to Callaway Editions Media Ventures, LLC.
3. Representations and Warranties of Callaway Golf. As a material
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inducement to Buyer to enter into this Agreement, Callaway Golf hereby
represents and warrants to Buyer, as follows:
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3.1 Organization. Callaway Golf is a corporation duly organized,
------------
validly existing and in good standing under the laws of California and is
qualified to do business in every jurisdiction in which its ownership of
property or conduct of its business requires it to qualify as foreign
corporation. Callaway Golf has all necessary corporate powers and corporate
authority to carry on its business as now conducted presently and presently
proposed to be conducted and to execute, deliver and perform this Agreement and
any related agreements to which it is a party.
3.2 Membership Interest and Related Matters. As of the date hereof,
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the Membership Interest represents Callaway Golf''s entire ownership interest in
CGMV and is held beneficially and of record by Callaway Golf free and clear of
all liens. The assignment of its Membership Interest by Callaway Golf as
provided for herein is an absolute conveyance to Buyer of all of the right,
title and interest, free and clear of any and all liens, of Callaway Golf in the
Membership Interest.
3.3 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement and all of the other agreements and instruments contemplated
hereby to which Callaway Golf is a party have been duly authorized, executed and
delivered by Callaway Golf. This Agreement constitutes a valid and binding
obligation of Callaway Golf, enforceable in accordance with its terms, and all
other agreements and instruments contemplated hereby to which Callaway Golf is a
party, shall each constitute a valid and binding obligation of Callaway Golf,
enforceable in accordance with their respective terms. The execution and
delivery by Callaway Golf of this Agreement and all other agreements and
instruments contemplated hereby to which Callaway Golf is a party and the
fulfillment of and compliance with the respective terms hereof and thereof by
Callaway Golf do not and shall not (i) conflict with or result in a breach of
the terms, conditions or provisions of, (ii) constitute a default under (whether
with or without the passage of time, the giving of notice or both), (iii) result
in the creation of any lien upon the Membership Interest, (iv) give any Person
the right to modify, terminate or accelerate any obligation under, (v) result in
a violation of, or (vi) require any authorization, consent, approval, exemption
or other action by or notice or declaration to, or filing with, any Person or
any court or administrative or governmental body or agency pursuant to, the
organizational documents of Callaway Golf, or any material law, statute, rule or
regulation to which Callaway Golf is subject, or any agreement, instrument,
order, judgment or decree to which Callaway Golf is subject.
4. Representations and Warranties of Buyer. As a material inducement to
---------------------------------------
Callaway Golf to enter into this Agreement and take the actions set forth in
Section 1, Buyer hereby represents and warrants to Callaway Golf as follows:
4.1 Organization, Power and Authority. Buyer is duly organized,
---------------------------------
validly existing and in good standing under the laws of its jurisdiction of
organization. Buyer possess all requisite power and authority necessary to
carry out the transactions contemplated by this Agreement.
4.2 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement and all other agreements contemplated hereby to which Buyer is
a Party, have been duly
3
<PAGE>
authorized, executed and delivered by Buyer. This Agreement and all other
agreements contemplated hereby to which Buyer is a Party, shall each constitute
valid and binding obligations of Buyer, enforceable in accordance with its
terms. The execution and delivery by Buyer of this Agreement and all other
agreements contemplated hereby to which Buyer is a Party, the purchase of the
Membership Interest hereunder, and the fulfillment of and compliance with the
respective terms hereof and thereof by Buyer, do not and shall not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii)
constitute a default under (whether with or without the passage of time, the
giving of notice or both), (iii) give any third party the right to modify,
terminate or accelerate any obligation under, (iv) result in a violation of, or
(v) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any court or administrative or
governmental body or agency pursuant to, the organizational documents of Buyer,
or any material law, statute, rule or regulation to which Buyer is subject, or
any material agreement, instrument, order, judgment or decree to which Buyer is
subject.
5. Post-Closing Covenants.
----------------------
5.1 No Contracting. Buyer shall not at any time after the execution
---------------
of this Agreement enter into any contract, agreement or lease on behalf of
Callaway Golf or represent that it has authority to act on behalf of Callaway
Golf. Buyer acknowledges that it has no right to enter into any contract on
behalf of Callaway Golf or represent that it has authority to act on behalf of
Callaway Golf.
5.2 Further Assurances. If at any time after the execution of this
------------------
Agreement any further action is necessary or desirable to carry out the purposes
of this Agreement or the transactions contemplated hereby, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party may reasonably request,
all at the sole cost and expense of the requesting Party.
6. Definitions. For the purposes of this Agreement, the following terms
-----------
have the meanings set forth below:
"Membership Interest" means (i) Callaway Golf's entire interest as a
-------------------
member in CGMV, including all right, title and interest of Callaway Golf as a
member in CGMV and all rights and interests of any kind or nature under the
Operating Agreement as a member, including without limitation all voting,
inspection, management and rights in specific CGMV property; and (ii) all
dividends, distributions and earnings arising out of any of the foregoing and
all additions, replacements and substitutions to any and all of the foregoing.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
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<PAGE>
7. Miscellaneous.
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7.1 Fees and Expenses. Each Party shall pay all of its own fees and
-----------------
expenses (including fees and expenses of legal counsel, accountants, investment
bankers and other representatives and consultants) in connection with this
Agreement and the consummation of the transactions contemplated hereby. Callaway
Golf acknowledges that it shall not seek reimbursement from CGMV for the fees
and expenses of Callaway Golf incurred in the preparation and negotiation of
this Agreement. If any legal action or other proceeding relating to this
Agreement, the agreements contemplated hereby, the transactions contemplated
hereby or thereby or the enforcement of any provision of this Agreement or the
agreements contemplated hereby is brought against any Party, the prevailing
Party in such action or proceeding shall be entitled to recover all reasonable
expenses relating thereto (including attorneys' fees and expenses) from the
Party against which such action or proceeding is brought in addition to any
other relief to which such prevailing Party may be entitled.
7.2 Special Remedies and Enforcement. Each Party recognizes and
--------------------------------
agrees that a breach by one of the Parties ("Breaching Party"), of any of the
covenants set forth in this Agreement could cause irreparable harm to the other
Parties, that the Parties' remedies at law in the event of such breach would be
inadequate, and that, accordingly, in the event of any such breach a restraining
order or injunction or both may be issued against the Breaching Party in
addition to any other rights and remedies which are available to the Parties. If
this Section 7.2 is more restrictive than permitted by applicable Law, this
Section 7.2 shall be limited to the extent required by such Law.
7.3 Entire Agreement. Modifications. This Agreement, together with
-------------------------------
exhibits and schedules attached hereto, contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereby, and
contains all of the terms and conditions thereof and supersedes all prior
agreements and understandings relating to the subject matter hereof. No changes
or modifications of or additions to this Agreement shall be valid unless the
same shall be in writing and signed by each party hereto.
7.4 Waivers. No waiver of any of the provisions of this Agreement
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shall be deemed to be or shall constitute a waiver of any other provision of
this Agreement, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver of any provision of this Agreement shall be binding
on the parties hereto unless it is executed in writing by the party making the
waiver.
7.5 Successors and Assigns.
----------------------
7.5.1 This Agreement and all covenants and agreements contained
herein and rights, interests or obligations hereunder, by or on behalf of any of
the Parties hereto, shall bind and inure to the benefit of the respective
successors and assigns of the Parties hereto whether so expressed or not.
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<PAGE>
7.5.2 No Party may assign their rights or obligations under this
document. Any attempted assignment in violation of this Agreement shall be void
and of no effect.
7.6 Severability. Whenever possible, each provision of this
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Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any Person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law in any respect by a court of
competent jurisdiction, such provision shall be ineffective only to the extent
of such prohibition or illegality or unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
7.7 Counterparts. This Agreement may be executed simultaneously in
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counterparts (including by means of telecopied signature pages), any one of
which need not contain the signatures of more than one Party, but all such
counterparts taken together shall constitute one and the same Agreement.
7.8 Descriptive Heading; Interpretation. The headings and captions
-----------------------------------
used in this Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. The use of the word
"including" herein shall mean "including without limitation." The Parties intend
that each representation, warranty and covenant contained herein shall have
independent significance. If any Party has breached any representation, warranty
or covenant contained herein in any respect, the fact that there exists another
representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
7.9 No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the Parties and their permitted successors and assigns and nothing
herein expressed or implied shall give or be construed to give any Person,
other than the Parties and such permitted successors and assigns, any legal or
equitable rights hereunder.
7.10 Cooperation on Tax Matters. The Parties shall cooperate fully,
--------------------------
as and to the extent reasonably requested by each Party and at the requesting
Party's expense, in connection with any audit, litigation or other proceeding
with respect to Taxes. Such cooperation shall include the retention and (upon
any Party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Parties
agree (i) to retain all books and records with respect to Tax matters pertinent
to CGMV relating to any taxable period beginning before the effective date of
this Agreement until the expiration of the statute of limitations (and, to the
extent notified by any Party, any extensions thereof) applicable to such taxable
periods, and to abide by all record retention agreements entered into with any
taxing authority, and (ii) to give each Party reasonable written notice prior to
transferring, destroying or discarding any such books and records and, if any
Party
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<PAGE>
so requests, the other party as the case may be, shall allow such party to take
possession of such books and records.
7.11 Governing Law. This Agreement is made and shall be governed by,
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and construed and enforced in accordance with, the internal laws of the State of
California, without regard to the conflict of laws principles thereof, as the
same apply to agreements executed solely by residents of California and wholly
to be performed within California.
7.12 Authority. Each of the persons executing this Agreement
---------
represents and warrants that it is authorized to execute this Agreement and the
entity on whose behalf they are signing is bound by the terms hereof.
7.13 Notices. All notices, demands or other communications to be
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given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, one day after being sent to the recipient by reputable
overnight courier service (charges prepaid), upon machine-generated
acknowledgment of receipt after transmittal by facsimile or five (5) days after
being mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to the Parties at the addresses indicated below or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
To Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: David A. Rane, Executive Vice President,
Administration and Planning, and Chief Financial
Officer
With a copy to: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Steven C. McCracken, Executive Vice President,
Licensing, Chief Legal Officer and Secretary
To Buyer: Callaway Editions, Inc.
70 Bedford Street
New York, New York 10014
Attn: Nicholas Callaway, President, and Editor-in-Chief
With a Copy to: Neale M. Albert, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
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<PAGE>
7.14 No Strict Construction. The Parties have participated jointly
----------------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement.
7.15 Incorporation of Recitals. The Recitals to this Agreement are
-------------------------
incorporated herein by this referenced with the same force and effect as if set
forth in full herein.
7.16 Brokers. No broker, finder, or investment banker is entitled to
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any brokerage, finder's, or other fee or commission in connection with the
transactions hereunder based upon arrangements made by or on behalf of any party
to this Agreement.
7.17 No Public Announcement. Except as otherwise required by law, no
----------------------
party to this Agreement shall make or cause to be made any public announcement
or press release with respect to the terms of this Agreement or the transactions
contemplated hereby without the prior written approval of the other party
hereto, which consent shall not be unreasonably withheld or delayed.
7.18 Good Faith. All parties hereto agree to carry out the terms of
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this Agreement and to act in good faith with respect to the terms and conditions
contained herein before and after the execution hereof.
7.19 Time is of the Essence. Time is of the essence in this
----------------------
Agreement, and all of the terms, covenants and conditions hereof.
7.20 Venue; Submission to Jurisdiction. Each of the Parties submits
---------------------------------
to the jurisdiction of any state or federal court sitting in San Diego County,
California, in any action or proceeding arising out of or relating to this
Agreement, agrees that all claims in respect of the action or proceeding may be
heard and determined in any such court, and agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court.
Each of the Parties waives any defense of inconvenient forum to the maintenance
of any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto.
[The Balance of this Page Is Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Membership
Interest Purchase Agreement to be effective on March 9, 1999.
<TABLE>
<CAPTION>
<S> <C>
BUYER: CALLAWAY GOLF:
CALLAWAY EDITIONS, INC., a Delaware CALLAWAY GOLF COMPANY, a California
corporation corporation
By: /s/ Nicholas Callaway By: /s/ David A. Rane
------------------------------------ ----------------------------------------
Nicholas Callaway, President, and David A. Rane, Executive Vice President,
Editor-in-Chief Administration and Planning, and Chief
Financial Officer
</TABLE>
9
<PAGE>
EXHIBIT 10.27
LOAN TERMINATION AGREEMENT
THIS LOAN TERMINATION AGREEMENT (this "Agreement") is effective as of March
10, 1999, by and among Callaway Golf Company, a California corporation
("Callaway Golf"), and Callaway Golf Media Ventures, LLC, a California limited
liability company ("CGMV"). Callaway Golf and CGMV are sometimes collectively
referred to herein as the "Parties" and individually as a "Party." Capitalized
terms used herein and not otherwise defined herein have the meaning given to
such terms in Section 6 below.
RECITALS
A. Callaway Editions, Inc. ("Editions"), a Delaware corporation, and
Callaway Golf are members of CGMV and have entered into an Operating Agreement
for CGMV, dated January 26, 1998 (the "Operating Agreement"). Callaway Golf
owns an 80% membership interest in CGMV and Editions owns a 20% membership
interest in CGMV. Nicholas Callaway ("Nicholas"), an individual, is the
principal shareholder of Editions.
B. On January 26, 1998, CGMV and Callaway Golf entered into a Loan and
Security Agreement for up to Twenty Million Dollars ($20,000,000.00) (the "Loan
Agreement"), evidencing a loan from Callaway Golf to CGMV. As of March 8, 1999,
there was outstanding under the CGMV Loan the principal amount plus accrued
interest of approximately Two Million One Hundred Forty-Eight Thousand Seven
Hundred Sixty-Four Dollars and Thirty-Nine Cents ($2,148,764.39) ("Existing
Balance"). Callaway Golf and CGMV have previously entered into a Loan
Forgiveness Agreement effective March 8, 1999 (the "Loan Forgiveness Agreement")
which forgave the Existing Balance.
C. CGMV and Callaway Golf desire to terminate the Loan Agreement such that
Callaway Golf shall have no further obligation to loan funds to CGMV pursuant to
the terms of the Loan Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
understandings herein contained, as well as for other good and valuable
consideration, acknowledged by each of them to be satisfactory and adequate, the
Parties hereby agree as follows:
1. Transaction.
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1.1 Termination of the Loan Agreement. Callaway Golf has delivered to
---------------------------------
CGMV, by wire transfer, One Million Dollars ($1,000,000) as consideration for
termination of the Loan Agreement (the "Liquidation Payment"). The Loan
Agreement is hereby terminated and of no further effect.
<PAGE>
2. Deliveries.
----------
2.1 Deliveries by Callaway Golf. Callaway Golf has delivered the
---------------------------
following to Buyer:
2.1.1 Resolutions of Callaway Golf. Certified copies of the
----------------------------
resolutions duly adopted by Callaway Golf's board of directors authorizing the
execution, delivery and performance of this Agreement.
2.1.2 Liquidation Payment. The Liquidation Payment in the manner
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and amount set forth in Section 1.1.
2.2 Deliveries by CGMV. CGMV has delivered the following to Callaway
------------------
Golf:
2.2.1 Resolutions. Certified copies of the resolutions duly
-----------
adopted by CGMV authorizing the execution, delivery and performance of this
Agreement.
3. Representations and Warranties of Callaway Golf. As a material
-----------------------------------------------
inducement to CGMV to enter into this Agreement, Callaway Golf hereby represents
and warrants to CGMV as follows:
3.1 Organization. Callaway Golf is a corporation duly organized,
------------
validly existing and in good standing under the laws of California and is
qualified to do business in every jurisdiction in which its ownership of
property or conduct of its business requires it to qualify as foreign
corporation. Callaway Golf has all necessary corporate powers and corporate
authority to carry on its business as now conducted presently and presently
proposed to be conducted and to execute, deliver and perform this Agreement and
any related agreements to which it is a party.
3.2 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement has been duly authorized, executed and delivered by Callaway
Golf. This Agreement constitutes a valid and binding obligation of Callaway
Golf, enforceable in accordance with its terms. The execution and delivery by
Callaway Golf of this Agreement and the fulfillment of and compliance with the
respective terms hereof and thereof by Callaway Golf do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under (whether with or without the passage of time,
the giving of notice or both), (iii) give any Person the right to modify,
terminate or accelerate any obligation under, (iv) result in a violation of, or
(v) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any Person or any court or
administrative or governmental body or agency pursuant to, the organizational
documents of Callaway Golf, or any material law, statute, rule or regulation to
which Callaway Golf is subject, or any agreement, instrument, order, judgment or
decree to which Callaway Golf is subject.
2
<PAGE>
4. Representations and Warranties of CGMV. As a material inducement to
--------------------------------------
Callaway Golf to enter into this Agreement and take the actions set forth in
Section 1, CGMV hereby represents and warrants to Callaway Golf as follows:
4.1 Organization, Power and Authority. CGMV is a duly organized,
---------------------------------
validly existing and in good standing under the laws of its jurisdiction of
organization. CGMV possess all requisite power and authority necessary to carry
out the transactions contemplated by this Agreement.
4.2 Authorization; No Breach. The execution, delivery and performance
------------------------
of this Agreement has been duly authorized by CGMV. This Agreement constitutes
valid and binding obligations of CGMV, enforceable in accordance with its terms.
The execution and delivery by CGMV of this Agreement and the fulfillment of and
compliance with the respective terms hereof and thereof by CGMV do not and shall
not (i) conflict with or result in a breach of the terms, conditions or
provisions of, (ii) constitute a default under (whether with or without the
passage of time, the giving of notice or both), (iii) give any third party the
right to modify, terminate or accelerate any obligation under, (iv) result in a
violation of, or (v) require any authorization, consent, approval, exemption or
other action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to, the organizational
documents of CGMV, or any material law, statute, rule or regulation to which
CGMV is subject, or any material agreement, instrument, order, judgment or
decree to which CGMV is subject.
5. Post-Closing Covenants.
----------------------
5.1 No Contracting. CGMV shall not at any time after the execution of
--------------
this Agreement enter into any contract, agreement or lease on behalf of Callaway
Golf or represent that it has authority to act on behalf of Callaway Golf. CGMV
acknowledges it has no right to enter any contract, agreement or lease on behalf
of Callaway Golf or represent that it has authority to act on behalf of Callaway
Golf.
5.2 Further Assurances. If at any time after the execution of this
------------------
Agreement any further action is necessary or desirable to carry out the purposes
of this Agreement or the transactions contemplated hereby, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party may reasonably request,
all at the sole cost and expense of the requesting Party.
6. Definitions. For the purposes of this Agreement, the following terms
-----------
have the meanings set forth below:
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
3
<PAGE>
7. Miscellaneous.
-------------
7.1 Fees and Expenses. Each Party shall pay all of its own fees and
-----------------
expenses (including fees and expenses of legal counsel, accountants, investment
bankers and other representatives and consultants) in connection with this
Agreement and the consummation of the transactions contemplated hereby. Callaway
Golf acknowledges that it shall not seek reimbursement from CGMV for the fees
and expenses incurred by Callaway Golf in the negotiation and preparation of
this Agreement. If any legal action or other proceeding relating to this
Agreement, the agreements contemplated hereby, the transactions contemplated
hereby or thereby or the enforcement of any provision of this Agreement or the
agreements contemplated hereby is brought against any Party, the prevailing
Party in such action or proceeding shall be entitled to recover all reasonable
expenses relating thereto (including attorneys' fees and expenses) from the
Party against which such action or proceeding is brought in addition to any
other relief to which such prevailing Party may be entitled.
7.2 Special Remedies and Enforcement. Each Party recognizes and
--------------------------------
agrees that a breach by one of the Parties ("Breaching Party"), of any of the
covenants set forth in this Agreement could cause irreparable harm to the other
Parties, that the Parties' remedies at law in the event of such breach would be
inadequate, and that, accordingly, in the event of any such breach a restraining
order or injunction or both may be issued against the Breaching Party in
addition to any other rights and remedies which are available to the Parties. If
this Section 7.2 is more restrictive than permitted by applicable law, this
Section 7.2 shall be limited to the extent required by such law.
7.3 Entire Agreement. Modifications. This Agreement, together with
-------------------------------
exhibits and schedules attached hereto, contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereby, and
contains all of the terms and conditions thereof and supersedes all prior
agreements and understandings relating to the subject matter hereof. No changes
or modifications of or additions to this Agreement shall be valid unless the
same shall be in writing and signed by each party hereto.
7.4 Waivers. No waiver of any of the provisions of this Agreement
-------
shall be deemed to be or shall constitute a waiver of any other provision of
this Agreement, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver of any provision of this Agreement shall be binding
on the parties hereto unless it is executed in writing by the party making the
waiver.
7.5 Successors and Assigns.
----------------------
7.5.1 This Agreement and all covenants and agreements contained
herein and rights, interests or obligations hereunder, by or on behalf of any of
the Parties hereto, shall bind and inure to the benefit of the respective
successors and assigns of the Parties hereto whether so expressed or not.
4
<PAGE>
7.5.2 No Party may assign their rights or obligations under this
document. Any attempted assignment in violation of this Agreement shall be void
and of no effect.
7.6 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any Person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law in any respect by a court of
competent jurisdiction, such provision shall be ineffective only to the extent
of such prohibition or illegality or unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
7.7 Counterparts. This Agreement may be executed simultaneously in
------------
counterparts (including by means of telecopied signature pages), any one of
which need not contain the signatures of more than one Party, but all such
counterparts taken together shall constitute one and the same Agreement.
7.8 Descriptive Heading; Interpretation. The headings and captions
-----------------------------------
used in this Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. The use of the word
"including" herein shall mean "including without limitation." The Parties
intend that each representation, warranty and covenant contained herein shall
have independent significance. If any Party has breached any representation,
warranty or covenant contained herein in any respect, the fact that there exists
another representation, warranty or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
7.9 No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the Parties and their permitted successors and assigns and nothing
herein expressed or implied shall give or be construed to give any Person, other
than the Parties and such permitted successors and assigns, any legal or
equitable rights hereunder.
7.10 Cooperation on Tax Matters. The Parties shall cooperate fully,
as and to the extent reasonably requested by each Party and at the requesting
Party's expense, in connection with any audit, litigation or other proceeding
with respect to Taxes. Such cooperation shall include the retention and (upon
any Party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Parties
agree (i) to retain all books and records with respect to Tax matters pertinent
to CGMV relating to any taxable period beginning before the effective date of
this Agreement until the expiration of the statute of limitations (and, to the
extent notified by any Party, any extensions thereof) applicable to such taxable
periods, and to abide by all record retention agreements entered into with any
taxing authority, and (ii) to give each Party reasonable written notice prior to
transferring, destroying or discarding any such books and records and, if any
Party
5
<PAGE>
so requests, the other party as the case may be, shall allow such party to
take possession of such books and records.
7.11 Governing Law. This Agreement is made and shall be governed by,
-------------
and construed and enforced in accordance with, the internal laws of the State of
California, without regard to the conflict of laws principles thereof, as the
same apply to agreements executed solely by residents of California and wholly
to be performed within California.
7.12 Authority. Each of the persons executing this Agreement
---------
represents and warrants that it is authorized to execute this Agreement and the
entity on whose behalf they are signing is bound by the terms hereof.
7.13 Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, one day after being sent to the recipient by reputable
overnight courier service (charges prepaid), upon machine-generated
acknowledgment of receipt after transmittal by facsimile or five (5) days after
being mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to the Parties at the addresses indicated below or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
To Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: David A. Rane, Executive Vice President,
Administration and Planning, and Chief Financial
Officer
With a copy to: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Steven C. McCracken, Executive Vice President,
Licensing, Chief Legal Officer and Secretary
To CGMV: Callaway Editions, Inc.
70 Bedford Street
New York, New York 10014
Attn: Nicholas Callaway, President, and Editor-in-Chief
6
<PAGE>
With a Copy to: Neale M. Albert, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
7.14 No Strict Construction. The Parties have participated jointly
----------------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement.
7.15 Incorporation of Recitals. The Recitals to this Agreement are
-------------------------
incorporated herein by this referenced with the same force and effect as if set
forth in full herein.
7.16 Brokers. No broker, finder, or investment banker is entitled to
-------
any brokerage, finder's, or other fee or commission in connection with the
transactions hereunder based upon arrangements made by or on behalf of any party
to this Agreement .
7.17 No Public Announcement. Except as otherwise required by law, no
----------------------
party to this Agreement shall make or cause to be made any public announcement
or press release with respect to the terms of this Agreement or the transactions
contemplated hereby without the prior written approval of the other party
hereto, which consent shall not be unreasonably withheld or delayed.
7.18 Good Faith. All parties hereto agree to carry out the terms of
----------
this Agreement and to act in good faith with respect to the terms and conditions
contained herein before and after the execution hereof.
7.19 Time is of the Essence. Time is of the essence in this
----------------------
Agreement, and all of the terms, covenants and conditions hereof.
7.20 Venue; Submission to Jurisdiction. Each of the Parties submits
---------------------------------
to the jurisdiction of any state or federal court sitting in San Diego County,
California, in any action or proceeding arising out of or relating to this
Agreement, agrees that all claims in respect of the action or proceeding may be
heard and determined in any such court, and agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the Parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto.
[The Balance of this Page Is Intentionally Left Blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan Termination
Agreement to be effective on March 10, 1999.
<TABLE>
<CAPTION>
<S> <C>
CGMV: CALLAWAY GOLF:
CALLAWAY GOLF MEDIA VENTURES, LLC, a CALLAWAY GOLF COMPANY, a California
California limited liability company corporation
By: CALLAWAY EDITIONS, INC., a Delaware
corporation, Member
/s/ Nicholas Callaway /s/ David A. Rane
By:________________________________ By: ________________________________
Nicholas Callaway, President, and David A. Rane, Executive Vice President,
Editor-in-Chief Administration and Planning, and Chief
Financial Officer
</TABLE>
8
<PAGE>
EXHIBIT 10.28
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT ("Agreement") is made and effective as of
March 9, 1999 the "Effective Date"), by and between Callaway Golf Company, a
California corporation ("Callaway Golf"), and Callaway Golf Media Ventures, LLC,
a California limited liability company which concurrently herewith is changing
its name to Callaway Editions Media Ventures, LLC ("CEMV"). Capitalized terms
used herein and not otherwise defined herein have the meaning given to such
terms in Section 1 below.
RECITALS
A. Callaway Golf is the owner of all right, title, and interest in and to
the Licensed Mark and any and all trade dress, labels, and designs associated
therewith, together with the goodwill of the business symbolized thereby;
B. Callaway Golf and Callaway Editions, Inc., a Delaware corporation
("Editions"), previously formed CEMV for the purpose of publishing a multi-
volume series of illustrated, high-quality, golf-related books;
C. Callaway Golf and Editions are concurrently entering into a Membership
Interest Purchase Agreement (the "Purchase Agreement") whereby Editions is
purchasing Callaway Golf's membership interest in CEMV;
D. The Purchase Agreement contemplates Callaway Golf licensing the
Licensed Mark to CEMV for the purpose of publishing high-quality, golf-related
books; and
E. CEMV desires to obtain the right to use the Licensed Mark and Callaway
Golf is willing to license such right to CEMV on the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the promises and mutual agreements
contained herein and in the Purchase Agreement as well as for other good and
valuable consideration, acknowledged by each of them to be satisfactory and
adequate, the parties hereby agree as follows:
1. Definitions.
-----------
1.1 "Golf Book(s)" shall mean golf-related books, including
corresponding video, CD, DVD and audio rights (and future equivalents of each)
for each Golf Book.
1.2 "Licensed Mark" shall mean the two-word mark "Callaway Golf" in
the design set forth in Exhibit "A", or in such design as may be amended and
adopted by Callaway Golf in its sole discretion from time to time, and
incorporated herein by reference.
<PAGE>
1.3 "Net Sales" shall mean gross revenues of CEMV from the Golf
Books, minus returns and refunds.
2. License.
-------
2.1 Grant. Subject to the terms and conditions hereof, Callaway Golf
-----
hereby grants to CEMV, and CEMV accepts from Callaway Golf, for the term of this
Agreement, a nontransferable, limited license to use the Licensed Mark in
connection with Golf Books. The license granted herein shall not be
sublicenseable except that CEMV shall have the right to sublicense third-parties
the right to publish (including manufacturing and distributing rights) Golf
Books created by CEMV.
2.2 Exclusivity. During the Initial Term and any Renewal Term of
-----------
this Agreement (as defined in Sections 10.1.1 and 10.1.2 below), the license
granted in this Agreement shall be mutually exclusive, such that neither party
hereto may be involved with the publication of any Golf Books (other than the
Golf Books using the Licensed Mark as provided in this Agreement) without the
prior written consent of the other party, which consent shall be in the sole
discretion of such other party. Moreover, during the term of this Agreement
Callaway Golf shall not use or license any other party to use the name "Callaway
Golf" in connection with the publication of any other books. Notwithstanding,
nothing herein shall preclude Callaway Golf from producing and distributing
products and materials that are ancillary to its business, including but not
limited to catalogues, brochures, calendars, price lists, playing cards, hang
tags and promotional materials.
2.3 Reservation of Rights. Nothing herein shall be construed to
---------------------
grant CEMV the right to use any Callaway Golf mark other than the Licensed Mark.
Callaway Golf expressly reserves all rights with respect to all trademarks or
service marks that may be owned by it or licensed to it which are not expressly
licensed to CEMV under this Agreement.
2.4 Technical Access. Callaway Golf grants to CEMV the right to
----------------
reasonable access to Callaway Golf technical personnel without charge; provided,
however, that such access shall not exceed thirty (30) hours of Callaway Golf
personnel time in any one calendar month. All such access shall be coordinated
through a single individual identified by Callaway Golf.
2.5 Termination of All Prior Licenses. The license to use the
---------------------------------
"Callaway Golf" mark which was a part of the Operating Agreement for CEMV dated
January 26, 1998 as well as any other license from Callaway Golf to CEMV shall
hereby be terminated.
3. Quality Standards.
-----------------
3.1 Maintenance of Quality. In the course of publishing the Golf
----------------------
Books, CEMV shall not allow the editorial and technical quality of any Golf Book
to fall below the editorial and technical quality of the books published by
Editions as of the Effective Date hereof, and all Golf Books shall be hard or
flexicover, printed on high-quality paper, in color and sold by CEMV to
2
<PAGE>
respected and traditional premium market channels (collectively, the "Standards
and Specifications"). The Standards and Specifications are designed to ensure
that the Golf Books are consistent with the reputation enjoyed by Callaway Golf
and the Licensed Mark.
3.2 Rights of Inspection. To ensure that the Standards and
--------------------
Specifications are maintained, Callaway Golf and its authorized agents and
representatives shall have the right, upon reasonable notice, to visit CEMV's
place(s) of business at all reasonable times and to review the products,
advertisements and marketing materials of CEMV.
3.3 Pre-Production Product Approval. Prior to commercial production
-------------------------------
of any Golf Book, CEMV shall provide to Callaway Golf sufficient samples or
mock-ups to allow Callaway Golf to evaluate and approve the quality of such Golf
Book and the manner of use of the Licensed Mark. CEMV shall not produce or
distribute any Golf Book which has not been approved in writing by Callaway Golf
as being in compliance with the requirements of Section 3.1, which approval
shall not be unreasonably withheld.
3.4 Production Control. CEMV shall, from time to time during
------------------
production and distribution, upon the request of Callaway Golf, furnish without
cost to Callaway Golf a reasonable number of samples of the Golf Books, which
samples may be selected at random by Callaway Golf or pursuant to a reasonable
sampling procedure specified by Callaway Golf. If Callaway Golf reasonably
determines that such samples do not meet the quality standards required in this
Agreement, Callaway Golf shall notify CEMV of the deficiencies in such samples
and CEMV shall immediately discontinue all production and distribution of such
deficient Golf Books until such time as additional samples are approved by
Callaway Golf, which approval shall not be unreasonably withheld.
4. Ownership of Licensed Mark; Modifications.
-----------------------------------------
4.1 Callaway Golf's Ownership Rights. CEMV acknowledges Callaway
--------------------------------
Golf's exclusive right, title, and interest in and to the Licensed Mark and
acknowledges that nothing herein shall be construed to accord to CEMV any rights
in the Licensed Mark except as otherwise expressly so provided. CEMV
acknowledges that its use of the Licensed Mark hereunder will not create in it
any right, title or interest in the Licensed Mark and that all such use of the
Licensed Mark and the goodwill generated thereby will inure to the benefit of
Callaway Golf. CEMV warrants and represents with respect thereto as follows:
4.1.1 CEMV will not at any time challenge Callaway Golf's right,
title, or interest in the Licensed Mark or the validity of the Licensed Mark or
any registration thereof;
4.1.2 CEMV will not do or cause to be done or omit to do
anything, the doing, causing, or omitting of which would contest or in any way
infringe or dilute the rights of Callaway Golf in the Licensed Mark;
3
<PAGE>
4.1.3 CEMV will not represent that it has any ownership in or
rights with respect to the Licensed Mark other than rights conferred by this
Agreement; and
4.1.4 CEMV will not, during the term of this Agreement, use any
trademark, service mark, trade name, insignia or logo that infringes or dilutes
the rights of Callaway Golf in the Licensed Mark.
4.2 Changes and Modifications to the Licensed Mark. CEMV may propose
----------------------------------------------
changes to the design portion of the Licensed Mark for adoption and approval by
Callaway Golf in Callaway Golf's sole and absolute discretion. The Licensed
Mark, as so modified or changed, shall for all purposes be deemed to be the
Licensed Mark referred to in this Agreement. Any and all such modifications or
changes in said Licensed Mark shall be the sole and absolute property of
Callaway Golf, and Callaway Golf shall have the exclusive right to register such
modified or changed marks as trademarks and/or service marks.
5. Undertakings of CEMV Respecting the Licensed Mark.
-------------------------------------------------
5.1 Marking; Compliance with Trademark Laws. CEMV shall (1) cause
---------------------------------------
the appropriate designation "TM," ''SM,'' or the registration symbol "(R)" to be
placed adjacent to the Licensed Mark in connection with each use or display
thereof and to indicate such additional information as Callaway Golf shall
specify from time to time concerning the licensed rights under which CEMV uses
the Licensed Mark, and (2) comply with all laws in force from time to time
pertaining to CEMV's use of the Licensed Mark.
5.2 No Use Objectionable to Callaway Golf. CEMV shall not use the
-------------------------------------
Licensed Mark on or in connection with any product, signage, display, packaging,
or marketing material or in any manner to which Callaway Golf at any time
reasonably objects. Except as approved by Callaway Golf in writing, in no event
shall CEMV use the Licensed Mark on any book or in any manner which would
degrade the reputation of Callaway Golf or its products in any material way.
6. Prosecution and Defense of Infringement Claims.
----------------------------------------------
6.1 Notice and Prosecution of Infringement of Marks. If CEMV becomes
-----------------------------------------------
aware of any apparent infringement of the Licensed Mark, any petition to cancel
any registration of the Licensed Mark, or any attempted use of or any
application to register any mark confusingly similar to, or a colorable
imitation of, the Licensed Mark, CEMV shall promptly notify Callaway Golf of
such infringement, petition, use or application. Callaway Golf shall have the
sole right, in its sole discretion, to:
6.1.1 Institute and prosecute any actions for such infringement
of the Licensed Mark;
6.1.2 Defend any petition to cancel any registration of the
Licensed Mark; and
4
<PAGE>
6.1.3 Oppose any attempted use of or any application to register any
mark confusingly similar to, or a colorable imitation of, the Licensed Mark.
6.1.4 Any damages and costs recovered through such proceedings shall
belong exclusively to Callaway Golf, and Callaway Golf shall be solely
responsible for all costs and expenses (including attorneys' fees) of
prosecuting such actions. CEMV shall provide Callaway Golf with requested
assistance in connection with such proceedings, and Callaway Golf shall
reimburse CEMV's reasonable, pre-approved, out-of-pocket costs of providing such
assistance.
6.2 Notice and Defense of Third-Party Infringement Claims. CEMV
-----------------------------------------------------
shall have primary responsibility for defending against any and all claims
charging service mark or trademark infringement involving the use by CEMV of the
Licensed Mark. Callaway Golf shall provide CEMV with reasonably requested
assistance in connection with such proceedings, and CEMV shall reimburse
Callaway Golf's reasonable out-of-pocket costs of providing such assistance.
CEMV shall keep Callaway Golf informed of the status of such proceeding and
supply Callaway Golf with any requested documents regarding such proceedings.
Any expenses, losses, damages, or judgments (including attorneys' fees) in
connection with claims alleging service mark or trademark infringement involving
the use by CEMV of the Licensed Mark shall be the responsibility of CEMV without
any claim against Callaway Golf for any portion thereof. CEMV shall obtain
Callaway Golf's approval before entering into any compromise, settlement or
stipulation regarding such proceeding, which approval Callaway Golf shall not
unreasonably withhold.
6.3 Callaway Golf's Rights to Defend Infringement Claims. In the
----------------------------------------------------
event CEMV does not within a reasonable period (having due regard for the
protection of the Licensed Mark) defend against a claim alleging service mark or
trademark infringement involving the use by CEMV of the Licensed Mark, Callaway
Golf shall have the right, but shall not be obligated, to defend such claim.
Any expenses, losses, damages, or judgments (including attorneys' fees) in
connection with such claims defended by Callaway Golf shall be the sole
responsibility of CEMV.
7. CEMV Defense and Indemnification of Licensor. CEMV shall defend,
--------------------------------------------
indemnify and hold harmless Callaway Golf, its subsidiaries and affiliates, and
their respective successors and assigns from all losses, costs, liabilities,
damages, claims and expenses of every kind and description, including reasonable
attorneys' fees, arising out of or resulting from any act or omission of CEMV
relating to the Golf Books, including, but not limited to (1) unfair or
fraudulent advertising claims, warranty claims and product defect or liability
claims pertaining to the Golf Books (but excluding any such claims which are the
result of CEMV's use of information regarding Callaway Golf's products which is
provided in writing to CEMV by Callaway Golf) , and (2) claims for unauthorized
use or misuse of any patent, trademark, copyright or other proprietary right
owned, used or controlled by any third party pertaining to the publishing of the
Golf Books.
8. Compliance with Laws by CEMV. In addition to compliance with laws
----------------------------
governing service mark and trademark usage as provided in Section 5 hereof, CEMV
agrees to comply, and to
5
<PAGE>
ensure that its agents comply, in all material respects with all laws governing
production, publication and distribution of the Golf Books.
9. Royalties.
---------
9.1 Royalty Amount. In exchange for the license granted above, CEMV
--------------
agrees to pay to Callaway Golf a royalty in the amount of two percent (2%) of
Net Sales during calendar years 1999 through 2003 and five percent (5%) of Net
Sales during calendar year 2004 and thereafter ("Royalties").
9.2 Payment Terms. Royalties for calendar years 1999 through 2002
-------------
shall be accrued and are payable by CEMV to Callaway Golf in 2003 with one-half
due on June 30, 2003 and the other one-half due on December 31, 2003. Within
thirty (30) days after the end of each calendar half year for calendar years
1999 through 2002, CEMV agrees to provide to Callaway Golf an accounting of all
Royalties accrued for sales and transfers in the preceding corresponding
calendar half year. Such accounting shall include, for each Golf Book, the type
and number of units sold or transferred and the Net Sales for such sales and
transfers. During calendar year 2003 and thereafter, within thirty (30) days of
the end of each calendar half year, CEMV agrees to pay Callaway Golf all
Royalties due hereunder for sales and transfers in the preceding corresponding
calendar half year. Each payment shall include an accounting setting forth the
basis for such a payment, including, for each Golf Book, the type and number of
units sold or transferred and the Net Sales for such sales and transfers. If no
Royalties are payable for a particular half year, an accounting reflecting no
Royalties being payable is still due to be delivered to Callaway Golf within
thirty (30) days after the end of each calendar half year. All payments shall
be made in U.S. dollars. Royalties for non-U.S. dollar Net Sales revenues shall
be converted to U.S. dollars in accordance with the standard accounting
procedure used by CEMV with respect to their worldwide sales generally.
9.3 Audit Right. Not more than once each calendar year, during
-----------
normal business hours, Callaway Golf shall have the right, upon five (5)
business days' written notice to CEMV, to audit the books of CEMV to confirm the
Royalties due hereunder. CEMV agrees to use reasonable efforts to cooperate
with Callaway Golf during any audit. In the event the audit shows Royalties to
have been underpaid by three percent (3%) or more, the costs of the audit shall
be paid by CEMV to Callaway Golf within ten (10) days of demand therefor by
Callaway Golf.
10. Term and Termination.
--------------------
10.1 Term and Renewals.
-----------------
10.1.1 Initial Term. The term of this Agreement shall commence on
------------
the Effective Date and expire on December 31, 2008, unless earlier terminated as
provided in this Agreement (the "Initial Term").
6
<PAGE>
10.1.2 Renewal. This Agreement shall automatically renew for
-------
successive three (3) year terms ("Renewal Terms") so long as CEMV achieves or
exceeds during the Initial Term and any Renewal Term the following:
(i) CEMV publishes at least two new Golf Books each calendar
year beginning in the year 2000 (for purposes of this provision, in the event
CEMV publishes more than two Golf Books in any calendar year, CEMV may use such
additional published Golf Book(s) toward the two Golf Book minimum only in the
calendar year immediately following the calendar year in which such Golf
Book(s)were first published); and
(ii) CEMV has complied and is in compliance with the terms and
conditions of this Agreement in all material respects.
10.2 Events of Termination. If any of the following events shall
---------------------
occur with respect to CEMV, each such occurrence shall be deemed an "Event of
Termination":
10.2.1 Bankruptcy of CEMV. The occurrence of a "Bankruptcy"
------------------
with respect to CEMV. For this purpose, "Bankruptcy" means a "Voluntary
Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means the
inability of CEMV generally to pay its debts as such debts become due, or an
admission in writing by CEMV of its inability to pay its debts generally or a
general assignment by CEMV for the benefit of creditors; the filing of any
petition or answer by CEMV seeking to adjudicate it a bankrupt or insolvent, or
seeking for itself any liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of CEMV or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking, consenting to or acquiescing in the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for CEMV
or for any substantial part of its property; or corporate action taken by CEMV
to authorize any of the actions set forth above. An "Involuntary Bankruptcy"
means without the consent or acquiescence of CEMV, the entering of an order for
relief or approving a petition for relief or reorganization or any other
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or other similar relief under any present or future
bankruptcy, insolvency or similar statute, law or regulation, or the filing of
any such petition against CEMV, which petition shall not be dismissed within
ninety (90) days, or, without the consent or acquiescence of CEMV, the entering
of an order appointing a trustee, custodian, receiver or liquidator of CEMV or
of all or any substantial part of the property of CEMV which order shall not be
dismissed within sixty (60) days.
10.2.2 Failure to Meet Minimum Publishing Level. CEMV fails to
----------------------------------------
publish at least two new Golf Books each calendar year beginning in the year
2000 (for purposes of this provision, in the event CEMV publishes more than two
Golf Books in any calendar year, CEMV may use such additional published Golf
Book(s) toward the two Golf Book minimum only in the calendar year immediately
following the calendar year in which such Golf Book(s)were first published).
7
<PAGE>
10.2.3 Breach of Agreements. CEMV fails to perform in
--------------------
accordance with any of the material terms and conditions contained in this
Agreement.
10.2.4 Dissolution or Cessation of Business. CEMV is dissolved
------------------------------------
or ceases operations for any reason (other than a merger between CEMV and
Editions) for more than twenty (20) consecutive days or thirty (30) days in any
twelve (12) month period.
10.2.5 Change in Management or Ownership. (i) Nicholas
---------------------------------
Callaway ceases to be personally and directly involved in management of the
publishing of the Golf Books, or (ii) a maker or seller or an affiliate of a
maker or seller of golf clubs, golf balls or golf-related accessories acquires
an ownership interest (other than a non-controlling interest in a publicly held
company) in CEMV or a successor to CEMV or in the assets of CEMV or a successor
to CEMV.
10.3 Callaway Golf's Right to Terminate Upon Event of Termination.
------------------------------------------------------------
Callaway Golf may, at its option, without prejudice to any other remedies it may
have, terminate this Agreement upon occurrence of an Event of Termination by
giving written notice of such termination to CEMV as follows:
10.3.1 Immediately, upon the occurrence of any Event of
Termination pursuant to Sections 10.2.1, 10.2.2, 10.2.4 or 10.2.5; or
10.3.2 After the expiration of thirty (30) days from CEMV's
receipt of notice from Callaway Golf of the occurrence of any Event of
Termination pursuant to Section 10.2.3, if such Event of Termination is then
still uncured.
10.4 Availability of Injunctive Relief. CEMV agrees that the remedy
---------------------------------
at law of Callaway Golf for any act or event that constitutes an Event of
Termination under this Agreement, other than the failure of CEMV to pay any
monies when due, will be inadequate and that Callaway Golf shall be entitled to
injunctive relief, specific performance or other such equitable relief, and that
CEMV shall not urge in any such proceeding that an adequate remedy exists at
law.
10.5 Post-Termination Obligations of CEMV. Upon the termination of
------------------------------------
this Agreement for any reason, all rights of CEMV to use the Licensed Mark shall
immediately thereafter cease. CEMV shall not thereafter operate or conduct
business under any name or in any manner that might tend to give the general
public the impression that this Agreement is still in force, or that CEMV has
any right to use the Licensed Mark. Notwithstanding the foregoing, upon
termination for any Event of Termination other than that set forth in Section
10.2.3, CEMV and its customers and distributors shall have the right to sell off
all Existing Inventory; provided, however, that the obligations of Section 9
shall be applicable to all such sales. For purposes of this section, "Existing
Inventory" shall mean both: (1) existing Golf Books in inventory and ready for
distribution and sale; and (2) Golf Books which are being produced or to be
produced and which CEMV is contractually obligated (at the time of termination)
to deliver to a sublicensee, unless such delivery obligation can be terminated
without penalty by CEMV.
8
<PAGE>
11. Miscellaneous.
-------------
11.1 Fees and Expenses. Each party shall pay all of its own fees and
-----------------
expenses (including fees and expenses of legal counsel, accountants, investment
bankers and other representatives and consultants) in connection with this
Agreement and the consummation of the transactions contemplated hereby. If any
legal action or other proceeding relating to this Agreement, the agreements
contemplated hereby, the transactions contemplated hereby or thereby or the
enforcement of any provision of this Agreement or the agreements contemplated
hereby is brought against any party, the prevailing party in such action or
proceeding shall be entitled to recover all reasonable expenses relating thereto
(including attorneys' fees and expenses) from the party against which such
action or proceeding is brought in addition to any other relief to which such
prevailing party may be entitled.
11.2 Special Remedies and Enforcement. Each party recognizes and
--------------------------------
agrees that a breach by one of the parties ("Breaching Party") of any of the
covenants set forth in this Agreement could cause irreparable harm to the other
party, that the party's remedies at law in the event of such breach would be
inadequate, and that, accordingly, in the event of any such breach a restraining
order or injunction or both may be issued against the Breaching Party in
addition to any other rights and remedies which are available to the parties.
If this Section 11.2 is more restrictive than permitted by applicable law, this
Section 11.2 shall be limited to the extent required by such law.
11.3 Entire Agreement. Modifications. This Agreement, together with
-------------------------------
exhibits attached hereto, contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby, and contains all of
the terms and conditions thereof and supersedes all prior agreements and
understandings relating to the subject matter hereof. No changes or
modifications of or additions to this Agreement shall be valid unless the same
shall be in writing and signed by each party hereto.
11.4 Waivers. No waiver of any of the provisions of this Agreement
-------
shall be deemed to be or shall constitute a waiver of any other provision of
this Agreement, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver of any provision of this Agreement shall be
binding on the parties hereto unless it is executed in writing by the party
making the waiver.
11.5 Successors and Assigns.
----------------------
11.5.1 This Agreement and all covenants and agreements
contained herein and rights, interests or obligations hereunder, by or on behalf
of any of the Parties hereto, shall bind and inure to the benefit of the
respective successors and assigns of the Parties hereto whether so expressed or
not.
9
<PAGE>
11.5.2 No Party may assign their rights or obligations under
this document. Any attempted assignment in violation of this Agreement shall be
void and of no effect.
11.6 Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law in any respect by a court of
competent jurisdiction, such provision shall be ineffective only to the extent
of such prohibition or illegality or unenforceability, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
11.7 Counterparts. This Agreement may be executed
------------
simultaneously in counterparts (including by means of telecopied signature
pages), any one of which need not contain the signatures of more than one party,
but all such counterparts taken together shall constitute one and the same
Agreement.
11.8 Descriptive Headings; Interpretation. The headings and
------------------------------------
captions used in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. The use of
the word "including" herein shall mean "including without limitation." The
parties intend that each representation, warranty and covenant contained herein
shall have independent significance. If any party has breached any
representation, warranty or covenant contained herein in any respect, the fact
that there exists another representation, warranty or covenant relating to the
same subject matter (regardless of the relative levels of specificity) which the
party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty or covenant.
11.9 No Third-Party Beneficiaries. This Agreement is for the
----------------------------
sole benefit of the parties and their permitted successors and assigns and
nothing herein expressed or implied shall give or be construed to give any
person, other than the parties and such permitted successors and assigns, any
legal or equitable rights hereunder.
11.10 Exhibits. All exhibits attached hereto or referred to
--------
herein are hereby incorporated in and made a part of this Agreement as if set
forth in full herein.
11.11 Governing Law. This Agreement is made and shall be
-------------
governed by, and construed and enforced in accordance with, the internal laws of
the State of California, without regard to the conflict of laws principles
thereof, as the same apply to agreements executed solely by residents of
California and wholly to be performed within California. This Agreement shall be
interpreted in accordance with and any disputes hereunder governed by the laws
of the State of California.
11.12 Venue; Submission to Jurisdiction. Each of the parties
submits to the exclusive jurisdiction of any state or federal court sitting in
San Diego County, California, in any
10
<PAGE>
action or proceeding arising out of or relating to this Agreement. Each party
further agrees that personal jurisdiction over such party may be effected by
service of process, and that when so made shall be as if served upon such party
personally within the State of California. Each of the parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety, or other security that might be required of
any other party with respect thereto.
11.13 Authority. Each of the persons executing this Agreement
---------
represents and warrants that it is authorized to execute this Agreement and the
entity on whose behalf they are signing is bound by the terms hereof.
11.14 Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, one day after being sent to the recipient by reputable
overnight courier service (charges prepaid), upon machine-generated
acknowledgment of receipt after transmittal by facsimile or five (5) days after
being mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to the parties at the addresses indicated below or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the sending party.
<TABLE>
<S> <C>
To Callaway Golf: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: David A. Rane, Executive Vice President,
Administration & Planning, & CFO
With a copy to: Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008-8815
Attn: Steven C. McCracken, Executive Vice President,
Licensing, Chief Legal Officer & Secretary
To CEMV: Callaway Editions Media Ventures, LLC
c/o Callaway Editions, Inc.
70 Bedford Street
New York, NY 10014
Attn: Nicholas Callaway, President and Editor-in-Chief
</TABLE>
11
<PAGE>
With a copy to: Neale M. Albert, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
11.15 No Strict Construction. The parties have participated jointly
----------------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement.
11.16 Incorporation of Recitals. The Recitals to this Agreement are
-------------------------
incorporated herein by this referenced with the same force and effect as if set
forth in full herein.
11.17 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
transactions hereunder based upon arrangements made by or on behalf of any party
to this Agreement.
11.18 No Public Announcement. Except as otherwise required by law,
----------------------
no party to this Agreement shall make or cause to be made any public
announcement or press release with respect to the terms of this Agreement
without the prior written approval of the other party hereto, which consent
shall not be unreasonably withheld or delayed.
11.19 Good Faith. All parties hereto agree to carry out the terms of
----------
this Agreement and to act in good faith with respect to the terms and conditions
contained herein before and after the execution hereof.
11.20 Time is of the Essence. To the extent a time period is
----------------------
specified in any of the terms, covenants and conditions of this Agreement, time
is of the essence.
/ / / / /
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
<TABLE>
<S> <C>
CALLAWAY GOLF COMPANY, CALLAWAY GOLF MEDIA VENTURES,
a California corporation LLC, a California limited liability company
which is concurrently herewith changing its
name to CALLAWAY EDITIONS MEDIA
By: /s/ David A. Rane VENTURES, LLC
--------------------------
David A. Rane
Executive Vice President, Administration By: CALLAWAY EDITIONS, INC.,
and Planning, and Chief Financial Officer a Delaware corporation, Member
By: /s/ Nicholas Callaway
---------------------------
Nicholas Callaway
President and Editor-in-Chief
</TABLE>
13
<PAGE>
EXHIBIT "A"
DESIGN OF LICENSED MARK
[LOGO APPEARS HERE]
14
<PAGE>
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results Of Operations
Years Ended December 31, 1998 and 1997
For the year ended December 31, 1998, net sales were $697.6 million, a 17%
decrease from the prior year. This decrease was primarily due to fewer metal
woods sales, particularly titanium metal woods, along with lower average sales
prices as a result of a metal wood wholesale price reduction on Big Bertha(R)
War Bird(R) stainless steel metal woods and Great Big Bertha(R) and Biggest
Big Bertha(R) titanium metal woods, both domestically and in many major
international markets. In terms of product sales, the decrease was attributable
to decreases in metal woods sales of $154.4 million, iron sales of $4.9 million
and other product sales of $14.9 million, partially offset by an increase in
Odyssey(R) product sales of $28.9 million, as only five months of Odyssey Golf,
Inc.'s ("Odyssey") results were included in the prior year's consolidated
results (see Note 13 to the Consolidated Financial Statements). The decrease in
metal woods sales was composed of decreases in Great Big Bertha(R) metal woods
of $96.8 million, Big Bertha(R) War Bird(R) metal woods of $77.7 million and
Biggest Big Bertha(R) metal woods of $57.9 million, which was partially offset
by sales of Big Bertha(R) Steelhead(TM) metal woods, which contributed $78.0
million to sales. The decrease in sales of irons was attributable to decreases
in Big Bertha(R) irons of $137.6 million, Big Bertha(R) Gold irons of $28.3
million and Great Big Bertha(R) irons of $31.1 million, which was partially
offset by a $192.4 million increase in Big Bertha(R) X-12(TM) irons.
In terms of net sales by region, domestic sales decreased $109.6 million
(20%) for the year ended December 31,1998 as compared with 1997. Net sales in
Japan and the rest of Asia decreased $23.2 million (27%) and $19.8 million
(37%), respectively, during 1998, while net sales in Europe and Canada
increased by $7.7 million (7%) and $7.7 million (44%), respectively, during
this period.
The Company believes the diversion of consumer purchases to the Company's
new Big Bertha(R) Steelhead(TM) metal woods and Big Bertha(R) X-12(TM) irons
from its higher priced titanium metal woods and irons, and marketplace
anticipation of the introduction of the Great Big Bertha(R) Hawk Eye(R)
titanium metal woods in January 1999, also contributed to the decrease in sales
in 1998. Additionally, the Company believes that competition has caused the
Company to lose some market share domestically partly because of pricing
strategies implemented by certain competitors. In addition, the economic
turmoil in Southeast Asia and Japan had an adverse effect on the Company's
sales and results of operations. Sales earlier in the year also were adversely
affected by unusual "El Nino" weather conditions in the United States. The
Company also believes that certain actions by the USGA in 1998 contributed to
the drop in metal wood sales.
For the year ended December 31, 1998, gross profit decreased to $296.0
million from $442.8 million in the prior year, and gross margin decreased to
42% from 53%. This decrease was primarily attributable to additions to the
reserve for excess inventory of $30.0 million in the fourth quarter, lower
average sales prices as a result of a metal wood wholesale price reduction on
Big Bertha(R) War Bird(R) stainless steel metal woods and Great Big Bertha(R)
and Biggest Big Bertha(R) titanium metal woods and the accompanying customer
compensation, an increase in warranty expense, and increased manufacturing
labor and overhead costs.
Selling expenses increased to $147.0 million in 1998 from $120.6 million in
1997. This increase was primarily attributable to costs associated with
Odyssey's putter operations, which the Company acquired in August 1997, and
foreign and domestic subsidiaries acquired during 1998, as well as an increase
in international advertising and other marketing expenses. This increase was
partially offset by a decrease in domestic promotional and endorsement
expenses.
General and administrative expenses increased to $98.0 million in 1998 from
$70.7 million in 1997. This increase was due to pre-production and non-
capitalized construction costs of the new golf ball facility, expenses
associated with foreign and domestic subsidiaries acquired during 1998,
expenses associated with the consolidation of the Company's European
operations, expenses associated with Odyssey's putter operations, including
amortization of goodwill, and an increase in the reserve for uncollectable
accounts receivable.
Research and development expenses increased to $36.8 million in 1998 from
$30.3 million in 1997. This increase was primarily attributable to increased
product design costs related to increased employee compensation, consulting and
other overhead expenses, including those associated with Callaway Golf Ball
Company and Odyssey's putter operations.
<PAGE>
Charges of $54.2 million were recorded in the fourth quarter of 1998 related
to the Company's cost reduction actions (see "Restructuring"). These charges
were primarily composed of $28.7 million for asset impairments, excess lease
costs, and costs to exit various non-core business activities, including
venues, new player development, interactive golf and publishing, $13.8 million
for impairment of assets due to the consolidation of continuing operations and
$11.7 million for employee separation costs.
Other income decreased to $3.9 million in 1998 from $4.6 million in 1997.
This decrease was due to a decrease in interest income resulting from lower
cash balances during 1998 versus 1997 and losses on dispositions of assets in
1998. This decrease was partially offset by net gains on foreign currency
transactions in 1998 of $1.6 million, as compared with net losses in 1997 of
$0.9 million.
Interest expense increased to $2.7 million in 1998 resulting from draws on
the Company's line of credit. The line of credit was not used during 1997.
YEARS ENDED DECEMBER 31, 1997 AND 1996
For the year ended December 31, 1997, net sales increased 24% to $842.9 million
compared to $678.5 million for the prior year. The growth in sales included
increases in the sales of metal woods, irons, and putters. Metal wood sales
increased $65.1 million primarily due to sales of Biggest Big Bertha(R)
Titanium Drivers. Iron sales increased $65.4 million primarily due to sales of
Great Big Bertha(R) Tungsten-Titanium(TM) Irons, which generated revenues of
$59.3 million for the year ended December 31, 1997. Also contributing to the
increase in net sales was the acquisition of certain assets and liabilities of
Odyssey Sports, Inc. by the Company's wholly-owned subsidiary, Odyssey Golf,
Inc., which contributed $20.5 million in net sales.
For the year ended December 31, 1997, gross profit increased to $442.8
million from $361.2 million in 1996 and cost of goods sold was relatively
unchanged as a percentage of sales from the prior year.
Selling expenses increased to $120.6 million in 1997 from $80.7 million in
1996. As a percentage of net sales, selling expenses increased to 14% from 12%.
The $39.9 million increase was primarily due to increased promotional and tour
expenses, higher costs related to the Company's performance centers and
additional selling expenses associated with the addition of Odyssey.
General and administrative expenses decreased to $70.7 million in 1997 from
$74.5 million in 1996. The $3.8 million decrease was primarily due to reduced
employee bonus and profit sharing expenses, partially offset by increased
start-up costs associated with the Company's golf ball operations and the
addition of Odyssey.
Research and development expenses increased to $30.3 million in 1997 as
compared to $16.2 million in 1996. This $14.1 million increase resulted from
increased expenditures related to casting technologies, golf ball development
and product engineering efforts.
Litigation settlement expense of $12.0 million represents the Company's
third quarter settlement of certain litigation brought against it and certain
officers of the Company by a former officer of the Company.
During the fourth quarter of 1997, the Company reversed an accrual for bonus
compensation of approximately $8.0 million due to the fact that certain
operating targets were not met.
Liquidity And Capital Resources
At December 31, 1998, cash and cash equivalents increased to $45.6 million from
$26.2 million at December 31, 1997, primarily as a result of $30.4 million
provided by operations and $63.5 million provided by financing activities,
partially offset by cash flows used in investing activities of $75.1 million.
After adding back non-cash expenses, the Company's operations generated
positive cash flows. Cash provided by financing activities was primarily due to
net proceeds from the Company's revolving line of credit and note payable, and
from the issuance of Common Stock, partially offset by dividends paid and
short-term debt retirements.
Cash used in investing activities totaled $75.1 million and resulted
primarily from capital expenditures for building improvements, production and
research and development machinery and computer equipment. Of these capital
expenditures, $47.7 million related to Callaway Golf Ball Company. The
acquisition of the Company's distributors in Korea, Belgium, Denmark, Canada,
France and Norway, the purchase of the remaining 80% interest in All-American
Golf LLC and the remaining 20% interest in Callaway Golf Trading GmbH also
contributed to cash used in investing activities.
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 line of
credit facility. Even though sales declined in 1998 and the Company does not
foresee any significant improvement
<PAGE>
in sales during 1999, the Company expects this trend to continue. The Company
replaced its $150.0 million line of credit facility in December 1998 with a
$75.0 million credit facility in conjunction with a two-staged loan funding
(see Note 4 to the Consolidated Financial Statements). 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 (see Note 16 to the
Consolidated Financial Statements). During 1998, the Company borrowed against
its line of credit to fund operations and finance capital expenditures. At
December 31, 1998, the Company had $3.0 million available on its line of
credit. The Company intends to repay its borrowings on its line of credit with
cash flow from operations.
As a result of the implementation of a business 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 are non-
cash. Cash outlays during 1998 for employee termination costs, contract
cancellation fees and other expenses were $10.2 million. Future material cash
outlays for employee termination costs, excess lease costs and other expenses
are estimated at $18.5 million. Of this amount, $5.3 million is anticipated to
occur during the first quarter of 1999, while the remainder, which primarily
relates to excess lease costs, will be paid through February 2013. These cash
outlays will be funded by cash flows from operations and the Company's line of
credit. 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 available borrowings under
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
On November 11, 1998, the Company announced that it had adopted a business plan
that included a number of cost reduction actions and operational improvements.
These actions include: the consolidation of the operations of the Company's
wholly-owned subsidiary, 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 largely completed during 1999. As a result of these actions, the
Company recorded one-time charges of $54.2 million during the fourth quarter of
1998. These charges (shown below in tabular format) primarily relate 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 the Company's 80% interest in Callaway
Golf Media Ventures (see Note 15 of the Consolidated Financial Statements), a
loss on the sale of All-American Golf (See Note 13 of the Consolidated
Financial Statements), 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. Without these charges, the
Company's earnings per diluted share would have been $0.13 for the year ended
December 31, 1998.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31,
1998, the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions will occur in the first quarter of 1999.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Details of the one-time charges are as follows:
One-Time Reserve Balance
(in thousands) Cash/Non-Cash Charge Activity at 12/31/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Elimination of Job Responsibilities $11,664 $ 8,473 $ 3,191
Severance packages Cash 11,603 8,412 3,191
Other Non-cash 61 61
Exiting Certain Non-core Business Activities $28,788 $12,015 $16,773
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731
Excess lease costs Cash 12,660 146 12,514
Contract cancellation fees Cash 2,700 1,504 1,196
Other Cash 356 24 332
Consolidation of Operations $13,783 $ 2,846 $10,937
Loss on disposition/impairment of assets Non-cash 12,364 2,730 9,634
Excess lease costs Cash 806 4 802
Other Cash 613 112 501
</TABLE>
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013.
The Company anticipates that this business plan will generate savings going
forward in excess of $40.0 million per year, beginning in 1999. In addition,
the Company is continuing to implement an ongoing process of reviewing its
manufacturing operations and its worldwide supplier network aimed at reducing
the cost of goods sold and generating significant savings. However, no
assurances can be given that the full amount of the anticipated savings will be
realized.
Certain Factors Affecting Callaway Golf Company
IMPLEMENTATION OF BUSINESS PLAN
During the fourth quarter of 1998, the Company began implementing its recently
adopted business plan. See "Liquidity and Capital Resources" and
"Restructuring" sections immediately above.
SALES; GROSS MARGIN; SEASONALITY
The Company believes that, although interest in golf appears to be growing, the
worldwide premium golf equipment market has been declining and that it may
continue to decline during the foreseeable future. Demand in the United States
for premium golf equipment also has declined in 1998, and the Company
experienced a decline in domestic sales in 1998. The economic turmoil in
Southeast Asia and Japan continues to cause contraction in the retail golf
markets in these countries and elsewhere around the world, and has had an
adverse effect on the Company's sales and results of operations. The Company
expects this situation to continue in 1999.
While sales of the Company's newly introduced Big Bertha(R) Steelhead(TM)
and Great Big Bertha(R) Hawk Eye(R) Titanium Metal Woods 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, are expected to decrease in 1999
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. See "Certain Factors Affecting Callaway Golf Company International
distribution."
The Company experienced a decrease in its gross margin as a percentage of
net sales during 1998 compared to historical levels. This decrease was
primarily due to additions to the reserve for excess inventory, lower sales
revenue associated with a metal wood wholesale price reduction on Big Bertha(R)
War Bird(R) Stainless Steel Metal Woods, and Great Big Bertha(R) and Biggest
Big Bertha(R) Titanium Metal Woods and accompanying customer compensation, an
increase in warranty expense, and increased manufacturing labor and overhead
costs. For the first three quarters of 1998, the Company's gross margin was
impacted negatively by increased sales of irons as a percentage of net sales,
which
<PAGE>
have lower margins than metal woods. However, this negative impact was offset
by a shift in product sales mix to a higher percentage of metal woods during
the fourth quarter of 1998. During 1999, the Company anticipates its gross
margin percentage to exceed its 1998 levels as a result of a shift in product
sales mix and decreased inventory obsolescence and manufacturing labor and
overhead costs. However, consumer acceptance of current and new product
introductions as well as 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. The Company's business generally follows this
seasonal trend and the Company expects this to continue. Unusual or severe
weather conditions such as the "El Nino" weather patterns 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 and the Company believes that such
competition has caused it to lose some unit market share and has negatively
affected sales. 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 also 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. For example, consumer support for shallow-faced metal woods
increased in 1998, and many of the Company's competitors are making such
products. The Company does not currently make a "shallow-faced" wood, and does
not believe that the designs currently in the market are superior to its
deeper-faced offerings. However, if "shallow-faced" products continue to gain
consumer acceptance, the Company's sales could be negatively affected.
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.
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 equipment. Thus, although the Company has
achieved certain successes in the introduction of its golf clubs in the past,
no assurances can be given that the Company will be able to continue to design
and manufacture golf clubs that achieve market acceptance in the future.
The rapid introduction of new products by the Company can result in
closeouts of existing inventories at both the wholesale and retail levels. Such
closeouts can result in reduced margins on the sale of older
<PAGE>
products, as well as reduced sales of new products, given the availability of
older products at lower prices. Historically, the Company has managed such
closeouts so as to avoid any material negative impact on the Company's
operations, but there can be no assurance that the Company will always be able
to do so.
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 which have
been sold. The Company monitors closely the level and nature of any product
breakage and, where appropriate, seeks to incorporate design and production
changes to assure its customers of the highest quality available in the market.
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. The Company believes it has adequate reserves for potential credit
losses. 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 1998 the Company increased its reserve for credit losses.
Management does not foresee any significant improvement in the golf equipment
market during 1999, and therefore expects this trend to continue. Accordingly,
there can be no assurance that the Company's results of operations or cash
flows will not be adversely impacted by the failure of its customers to meet
their obligations to the Company.
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 domestic 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
<PAGE>
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 must avoid infringing these patents or other intellectual property rights,
or it must obtain licenses to use them lawfully. 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 or to defend legal actions.
Despite its efforts to avoid such infringements, there can be no assurance that
Callaway Golf Ball Company will not infringe on the patents or other
intellectual property rights of third parties in its development efforts, or
that it will be able to obtain licenses to use any such rights, if necessary.
The Company has stringent procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for
dissemination of information and written confidentiality agreements with
employees and vendors. Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements. There can be no
assurance that these measures will prove adequate in all instances to protect
the Company's confidential information.
"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 domestic 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 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, the PGA European
Tour and the Nike Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's
products despite contractual commitments. To date, the Company believes that
the cessation of use by professional endorsers of Callaway(R) brand products
has not resulted in a significant amount of negative publicity.
<PAGE>
However, 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. The Company has created
cash "pools" that reward such usage. For the last several years, the Company
has experienced an exceptional level of driver penetration on the world's five
major professional tours, and the Company has heavily advertised that fact. It
is unlikely that the Company will be able to sustain this level of professional
usage in 1999. 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 in past years, during 1998, the Company continued its Big Bertha(R)
Players' Pools ("Pools") for the PGA, Senior PGA, LPGA and Nike Tours. Those
professional players participating in the Pools received cash for using
Callaway Golf products in professional tournaments, but were not bound to use
the products or grant any endorsement to the Company. The Company believes that
its professional endorsements and its Pools contributed to its usage on the
professional tours in 1998. However, in connection with its new business plan
for 1999 the Company has significantly reduced these Pools for the PGA and the
Senior PGA Tours, and has eliminated the Pools for the LPGA and Nike Tours. As
a result, the Company anticipates that the level of professional usage of the
Company's products will be lower in 1999 than 1998. Further, while it is not
clear whether professional endorsements materially contribute to retail sales,
it is possible that a decline in the level of professional usage 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 review of its business, the Company has
determined to discontinue, transfer or suspend certain business ventures not
directly associated with the Company's core business. See "Restructuring."
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 throughout the world 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 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 resources which may
temporarily detract from attention to the day-to-day business of the Company.
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. International reorganization also
could result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the acquisition of some or all of
the Company's foreign 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(R) golf clubs in Japan. This distributor
agreement runs through December 31, 1999. The Company does not intend to extend
it.
The Company has established ERC, a wholly owned Japanese corporation, for
the purpose of distributing Odyssey(R) products. 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 in Japan
through ERC, and it is possible that doing so will have a material adverse
effect on the Company's operations and financial performance.
<PAGE>
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 product 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. There can be no assurance as to if and when a successful
golf ball product will be developed or that the Company's investments will
ultimately be realized.
The Company's golf ball business is still in the developmental stage and, 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 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.
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 involves 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. The Company estimates the
assessment phase to be approximately 90% complete.
During the assessment phase it was determined that over 450 of the Company's
key systems were considered critical to the ongoing operations of the Company.
Of these critical systems, the manufacturer certifies that approximately 60%
are Y2K compliant, and the compliance of approximately 33% of the systems is
undeterminable until they can be tested. Those systems tested and found not to
be Y2K compliant, as well as the remaining 7% which are not Y2K compliant, will
be fixed on the schedule discussed below.
Also in connection with the assessment phase, the Company has been assessing
the compliance of its critical suppliers and customers. 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 Company has received information concerning the Y2K compliance status of
critical suppliers and customers in response to extensive inquiries initiated
in the Fall of 1998 to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Y2K issues. The process
of evaluating these suppliers and selected customers is continuing and is
expected to be completed by the fourth quarter of 1999.
<PAGE>
The Company has commenced the remediation phase and begun to identify and
implement remediation options for its critical systems. The Company expects to
complete this phase by mid-1999. Remediation for key systems will primarily
include altering the product or software code, upgrading or replacing the
product, recommending changes in how the product is used or retiring the
product.
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 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, although
recent testing of the software indicates that some level of remediation may be
required. The information systems of the majority of the Company's subsidiaries
have now been converted to the new system, and the Company anticipates
converting the remaining material subsidiaries by mid-year 1999.
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. The Company currently estimates that the total
cost of implementing its Year 2000 Plan will not exceed $6.0 million. This
preliminary estimate is based on presently available information and will be
updated as the Company continues its assessment and proceeds with
implementation. In particular, the estimate may need to be increased once the
Company has formulated its contingency plan. The total amount expended on the
Year 2000 Plan through December 1998 was $633,000, of which approximately
$414,000 related to repair or replacing of software and related hardware
problems and approximately $219,000 related to internal and external labor
costs.
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, or
if the remaining subsidiary conversions are not made or are not completed
timely, 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 not yet established a contingency plan, but intends to
formulate one to address unavoided or unavoidable risks and expects to have the
contingency plan formulated by July 1999. In particular, with respect to third
party component suppliers, the Company will develop contingency plans for
suppliers determined to be at high risk of noncompliance or business
disruption. The contingency plans are being developed on a case-by-case basis,
and may 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 that provide inadequate information. 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
<PAGE>
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. The Company does not anticipate 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.
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. During 1998, the
Company entered into forward foreign currency exchange rate contracts to hedge
payments due on intercompany transactions by one of its wholly-owned foreign
subsidiaries, Callaway Golf Europe Ltd. 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 intercompany
transactions being hedged, and the Company does not engage in hedging contracts
which exceed the amounts of the intercompany transactions.
However, pursuant to its new foreign exchange hedging policy, beginning in
January 1999, the Company also may use forward foreign currency exchange rate
contracts to hedge certain firm commitments and the related receivables and
payables with other foreign subsidiaries. Additionally, 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, which may be combined to form range forwards. 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 dollar and Korean won.
Additionally, the Company is exposed to interest rate risk from its Credit
Facilities (see Notes 4 and 16 to the Company's Consolidated Financial
Statements) which are indexed to the London Interbank Offering Rate ("LIBOR").
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 December 31, 1998 under 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 $1.2 million at December 31, 1998. 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 2 and 4 to the Consolidated Financial Statements outline the principal
amounts, weighted-average interest rates, fair values and other terms required
to evaluate the expected cash flows and sensitivity to interest rate changes.
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands, except share and per share data) December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,618 $ 26,204
Accounts receivable, net 73,466 124,470
Inventories, net 149,192 97,094
Deferred taxes 51,029 23,810
Other current assets 4,301 10,208
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 323,606 281,786
Property, plant and equipment, net 172,794 142,503
Intangible assets, net 127,779 112,141
Other assets 31,648 25,284
- ------------------------------------------------------------------------------------------------------------------------------
$ 655,827 $ 561,714
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 35,928 $ 30,063
Accrued employee compensation and benefits 11,083 14,262
Accrued warranty expense 35,815 28,059
Line of credit 70,919
Note payable 12,971
Accrued restructuring costs 7,389
Income taxes payable 9,903
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 184,008 72,384
Long-term liabilities:
Deferred compensation 7,606 7,905
Accrued restructuring costs 11,117
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares
authorized, none issued
and outstanding at December 31, 1998 and 1997
Common Stock, $.01 par value, 240,000,000 shares
authorized, 75,095,087
and 74,251,664 issued and outstanding at December 31, 1998 and 1997 751 743
Paid-in capital 258,015 337,403
Unearned compensation (5,653) (3,575)
Retained earnings 252,528 298,728
Accumulated other comprehensive income 1,780 (559)
Less: Grantor Stock Trust (5,300,000 shares at December
31, 1998
and 1997) at market (Note 5) (54,325) (151,315)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 453,096 481,425
- ------------------------------------------------------------------------------------------------------------------------------
$ 655,827 $ 561,714
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $697,621 100% $842,927 100% $678,512 100%
Cost of goods sold 401,607 58% 400,127 47% 317,353 47%
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 296,014 42% 442,800 53% 361,159 53%
Selling expenses 147,022 21% 120,589 14% 80,701 12%
General and administrative expenses 98,048 14% 70,724 8% 74,476 11%
Research and development costs 36,848 5% 30,298 4% 16,154 2%
Restructuring costs 54,235 8%
Litigation settlement 12,000 1%
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (40,139) (6%) 209,189 25% 189,828 28%
Interest and other income, net 3,911 4,586 5,804
Interest expense (2,671) (10) (37)
- ----------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (38,899) (6%) 213,765 25% 195,595 29%
Income tax (benefit) provision (12,335) 81,061 73,258
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(26,564) (4%) $132,704 16% $122,337 18%
==================================================================================================================================
(Loss) earnings per common share
Basic $ (0.38) $ 1.94 $ 1.83
Diluted $ (0.38) $ 1.85 $ 1.73
Common equivalent shares
Basic 69,463 68,407 66,832
Diluted 69,463 71,698 70,661
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(26,564) $ 132,704 $122,337
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization 35,885 19,408 12,691
Non-cash compensation 2,887 2,041 1,919
Tax benefit from exercise of stock options 3,068 29,786 14,244
Deferred taxes (36,235) 1,030 (4,420)
Non-cash restructuring costs 25,497
Loss (gain) on disposal of assets 1,298 2 (17)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net 51,575 (36,936) 3,510
Inventories, net (42,665) 6,271 (44,383)
Other assets (12,149) (6,818) (12,872)
Accounts payable and accrued expenses (4,357) 13,529 (15,395)
Accrued employee compensation and benefits (3,411) (2,437) 2,031
Accrued warranty expense 7,760 756 3,534
Income taxes payable 9,652 (2,636) 626
Accrued restructuring costs 7,389
Other liabilities (299) 2,796 2,902
Accrued restructuring costs - long-term 11,117
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,448 159,496 86,707
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (67,859) (67,938) (35,352)
Acquisitions, net of cash acquired (10,672) (129,256) (610)
Proceeds from sale of assets 3,417 72 72
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (75,114) (197,122) (35,890)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from line of credit 70,919
Proceeds from note payable 12,971
Short-term debt retirement (10,373)
Issuance of Common Stock 10,343 27,530 14,533
Retirement of Common Stock (917) (52,985)
Dividends paid, net (19,485) (19,123) (16,025)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 63,458 (44,578) (1,492)
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 622 (49) (25)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 19,414 (82,253) 49,300
Cash and cash equivalents at beginning of year 26,204 108,457 59,157
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45,618 $ 26,204 $108,457
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid for interest $ 2,162 $ 10 $ 37
Cash paid for income taxes $ 8,165 $ 54,358 $ 62,938
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands) Accumulated Current
Other Year's
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>
Balance, December 31, 1995 70,912 $ 709 $214,846 $ (2,420) $131,801 $ (89) $ (119,913) $224,934 <C>
- --------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 1,775 18 12,240 12,258
Tax benefit from exercise of
stock options 14,244 14,244
Compensatory stock and stock
options 2,604 (685) 1,919
Employee stock purchase plan 168 2 2,273 2,275
Cash dividends (17,297) (17,297)
Dividends on shares held by GST 1,272 1,272
Adjustment of GST shares to
market value 32,462 (32,462)
Equity adjustment from foreign
currency translation 325 325 $ 325
Net income 122,337 122,337 122,337
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 72,855 729 278,669 (3,105) 238,113 236 (152,375) 362,267 $ 122,662
- --------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 2,877 29 21,529 21,558
Tax benefit from exercise of
stock options 29,786 29,786
Compensatory stock and stock
options 2,511 (470) 2,041
Employee stock purchase plan 372 4 5,968 5,972
Stock retirement (1,852) (19) (52,966) (52,985)
Cash dividends (20,607) (20,607)
Dividends on shares held by GST 1,484 1,484
Adjustment of GST shares to
market value (1,060) 1,060
Equity adjustment from
foreign currency translation (795) (795) $ (795)
Net income 132,704 132,704 132,704
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 74,252 743 337,403 (3,575) 298,728 (559) (151,315) 481,425 $ 131,909
- -------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 391 4 4,433 4,437
Tax benefit from exercise
of stock options 3,068 3,068
Issuance of Restricted
Common Stock 130 1 4,029 (4,030)
Cancellation of Restricted
Common Stock (19) (597) 597
Compensatory stock and stock
options 1,532 1,355 2,887
Employee stock purchase plan 386 4 5,902 5,906
Stock retirement (45) (1) (765) (151) (917)
Cash dividends (20,969) (20,969)
Dividends on shares held
by GST 1,484 1,484
Adjustment of GST shares to
market value (96,990) 96,990
Equity adjustment from
foreign currency
translation 2,339 2,339 $ 2,339
Net loss (26,564) (26,564) (26,564)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 75,095 $ 751 $258,015 $ (5,653) $252,528 $ 1,780 $ (54,325) $453,096 $ (24,225)
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
THE COMPANY
- --------------------------------------------------------------------------------
Callaway Golf Company ("Callaway Golf" or the "Company") is a California
corporation formed in 1982. The Company designs, develops, manufactures and
markets high-quality, innovative golf clubs. Callaway Golf's primary products
include Big Bertha(R) metal woods with the War Bird(R) soleplate, Great Big
Bertha(R) titanium metal woods, Biggest Big Bertha(R) titanium drivers, Big
Bertha(R) Steelhead(TM) metal woods, Big Bertha(R) irons, Great Big Bertha(R)
Tungsten(R) Titanium(TM) irons, Big Bertha(R) X-12(TM) irons, Odyssey(R)
putters and wedges and various other putters.
NOTE 2
SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Callaway Golf Sales Company, Callaway Golf Ball Company,
Odyssey Golf, Inc. ("Odyssey"), CGV, Inc., All-American Golf LLC ("All-
American"), Callaway Golf Media Ventures ("CGMV"), Callaway Golf Europe Ltd.,
ERC International Company, Callaway Golf (Germany) GmbH, Callaway Golf Canada
Ltd., Callaway Golf Korea Ltd. and Callaway Golf Europe, S.A. All significant
intercompany transactions and balances have been eliminated.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Examples of such estimates include provisions for warranty, uncollectible
accounts receivable, inventory obsolescence and restructuring costs (Note 11).
Actual results could differ from those estimates, which could materially affect
future results of operations.
REVENUE RECOGNITION
Sales are recognized at the time goods are shipped, net of an allowance for
sales returns.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, trade
receivables and payables, forward foreign currency exchange contracts, its
revolving line of credit and note payable (Note 4). The carrying amounts of
these instruments approximate fair value because of their short maturities and
variable interest rates.
ADVERTISING COSTS
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs,
as incurred. Advertising expenses for 1998, 1997 and 1996 were $32,944,000,
$20,320,000 and $18,321,000, respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative translation
gains or losses are recorded as accumulated other comprehensive income in
shareholders' equity. Gains or losses resulting from foreign currency
transactions (transactions denominated in a currency other than the entity's
local currency) are included in the consolidated statement of operations. The
Company recorded transaction gains of $1,598,000 in 1998 and transaction losses
of $940,000 in 1997. The amounts recorded as a result of foreign currency
transactions in 1996 were not material.
During 1998, 1997 and 1996, the Company entered into forward foreign
currency exchange rate contracts to hedge payments due on intercompany
transactions by one of its wholly-owned foreign subsidiaries, Callaway Golf
Europe Ltd. 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. At December 31, 1998, 1997 and 1996,
<PAGE>
the Company had approximately $11,543,000, $2,575,000 and $5,774,000,
respectively, of foreign exchange contracts outstanding. The contracts
outstanding at December 31, 1998 mature between January and June of 1999. The
Company had net realized and unrealized gains on foreign exchange contracts of
$57,000 and $261,000 in 1998 and 1997, respectively, and net realized and
unrealized losses of $521,000 in 1996.
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 is
effective for all periods beginning after June 15, 1999; the Company has
elected to early adopt SFAS No. 133 on January 1, 1999.
Adoption of this statement does not significantly affect the way in which
the Company currently accounts for derivatives to hedge payments due on
intercompany transactions, as described above. Accordingly, no cumulative-
effect-type adjustments will be 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, which
may be combined to form range forwards. 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 transaction occurs. The ineffective portion of all hedges will be
recognized in current period earnings. Due to its current and expected future
limited use of derivative instruments, the Company does not expect that the
adoption of SFAS No. 133 will have a material impact on its results of
operations or financial position.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income for the
period by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share is calculated by dividing net income
for the period by the weighted-average number of common shares outstanding
during the period, increased by dilutive potential common shares ("dilutive
securities") that were outstanding during the period. Dilutive securities
include shares owned by the Callaway Golf Company Grantor Stock Trust (Note 5),
options issued pursuant to the Company's stock option plans (Note 7), potential
shares related to the Employee Stock Purchase Plan (Note 7) and rights to
purchase preferred shares under the Callaway Golf Company Shareholder Rights
Plan (Note 7). Dilutive securities related to the Callaway Golf Company Grantor
Stock Trust and the Company's stock option plans are included in the
calculation of diluted earnings per common share using the treasury stock
method. Dilutive securities related to the Employee Stock Purchase Plan are
calculated by dividing the average withholdings during the period by 85% of the
lower of the offering period price or the market value at the end of the
period. The dilutive effect of rights to purchase preferred shares under the
Callaway Golf Shareholder Rights Plan have not been included as dilutive
securities because the conditions necessary to cause these rights to be
redeemed were not met. A reconciliation of the numerators and denominators of
the basic and diluted earnings per common share calculations for the years
ended December 31, 1998, 1997 and 1996 is presented in Note 6.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with maturities of
three months or less.
The acquisition of substantially all of the assets and certain liabilities
of Odyssey Sports, Inc. (Note 13) and the repurchase and retirement of certain
of the Company's outstanding Common Stock necessitated the sale of certain
held-to-maturity debt securities with amortized costs of $115,428,000 and
$31,805,000, respectively, during 1997. These securities were purchased at a
discount and were sold within two weeks to two months of their respective
stated maturity dates. As such, the securities are considered to be sold at
maturity under the provisions of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." No realized or unrealized gains or
losses resulted from the sales of these securities.
<PAGE>
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of three to fifteen years. Repair and maintenance costs are charged to
expense as incurred. The Company's property, plant and equipment are
depreciated over the following periods:
----------------------------------------------------
Buildings and improvements 10-15 years
Machinery and equipment 5 years
Furniture, computers and equipment 3-5 years
Production molds 3 years
----------------------------------------------------
Normal repairs and maintenance are expensed as incurred. Expenditures that
materially increase values, change capacities or extend useful lives are
capitalized. Replacements are capitalized and the property, plant, and
equipment accounts are relieved of the items being replaced. The related costs
and accumulated depreciation of disposed assets are eliminated and any
resulting gain or loss on disposition is included in income.
LONG-LIVED ASSETS
The Company assesses potential impairments of its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset. During the fourth quarter of 1998, the Company implemented a
restructuring plan that included a number of cost reduction actions and
operational improvements (Note 11). As a result of this plan, impairment losses
were recorded for certain of the Company's long-lived assets.
INTANGIBLE ASSETS
Intangible assets consist primarily of trade name, trademark, trade dress,
patents and goodwill resulting from the purchase of substantially all of the
assets and certain liabilities of Odyssey Sports, Inc. and goodwill associated
with the purchase of certain foreign distributors (Note 13). Intangible assets
are amortized using the straight-line method over periods ranging from three to
40 years. During 1998 and 1997, amortization of intangible assets was
$5,466,000 and $1,778,000 respectively. Amortization expense for the year ended
December 31, 1996 was not material.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. Pro forma disclosures of
net income and earnings per share, as if the fair value-based method had been
applied in measuring compensation expense, are presented in Note 7.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax asset or liability is established
for the expected future consequences resulting from differences in the
financial reporting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) is the net change during the year in the deferred income
tax asset or liability.
Deferred taxes have not been provided on the cumulative undistributed
earnings of foreign subsidiaries since such amounts are expected to be
reinvested indefinitely. The Company provides a valuation allowance for its
deferred tax assets when, in the opinion of management, it is more likely than
not that such assets will not be realized.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that all components of
comprehensive income be reported in the financial statements in the period in
which they are recognized. The components of comprehensive income for the
Company include net income and foreign currency translation adjustments. Since
the Company has elected the indefinite reversal criterion, it does not accrue
income taxes on foreign currency translation adjustments. The financial
statements of prior periods presented have been reclassified for comparative
purposes.
<PAGE>
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
disclosure of certain information about the Company's operating segments,
products, geographic areas in which it operates and its major customers. This
information is presented in Note 14.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents and trade receivables.
The Company may invest its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. During 1998, no investments in U.S.
Government securities were held.
The Company operates in the golf equipment industry and 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. The Company maintains
reserves for potential credit losses, which it considers adequate to cover any
such losses.
During 1998, 1997, and 1996, approximately 38%, 35% and 32%, respectively,
of the Company's net sales were made to foreign customers. An adverse change in
either economic conditions abroad or the Company's relationship with
significant distributors could negatively impact the volume of the Company's
international sales and the Company's results of operations.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
period presentation.
NOTE 3
SELECTED FINANCIAL STATEMENT INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Cash, interest bearing $ 41,689 $ 24,438
Cash, non-interest bearing 3,929 1,766
- -------------------------------------------------------------------------------------
$ 45,618 $ 26,204
=====================================================================================
Accounts receivable, net:
Trade accounts receivable $ 83,405 $131,516
Allowance for doubtful
accounts (9,939) (7,046)
- -------------------------------------------------------------------------------------
$ 73,466 $124,470
=====================================================================================
Inventories, net:
Raw materials $102,352 $ 47,780
Work-in-process 1,820 3,083
Finished goods 81,868 51,905
- -------------------------------------------------------------------------------------
186,040 102,768
Reserve for obsolescence (36,848) (5,674)
- -------------------------------------------------------------------------------------
$149,192 $ 97,094
=====================================================================================
Property, plant and equipment, net:
Land $ 13,375 $ 16,398
Buildings and improvements 55,307 51,797
Machinery and equipment 57,334 45,332
Furniture, computers and
equipment 55,629 48,071
Production molds 17,472 13,690
Construction-in-process 52,920 19,361
- -------------------------------------------------------------------------------------
252,037 194,649
Accumulated depreciation (79,243) (52,146)
- -------------------------------------------------------------------------------------
$172,794 $142,503
=====================================================================================
Intangible assets:
Trade name $ 69,629 $ 69,629
Trademark and trade dress 29,841 29,841
Patents, goodwill and other 35,765 14,641
- -------------------------------------------------------------------------------------
135,235 114,111
Accumulated amortization (7,456) (1,970)
- -------------------------------------------------------------------------------------
$127,779 $112,141
- -------------------------------------------------------------------------------------
Accounts payable and accrued
expenses:
Accounts payable $ 10,341 $ 18,379
Note to related party (Note 15) 6,766
Accrued expenses 18,821 11,684
- -------------------------------------------------------------------------------------
$ 35,928 $ 30,063
=====================================================================================
Accrued employee compensation and
benefits:
Accrued payroll and taxes $ 6,178 $ 9,729
Accrued vacation and sick pay 4,423 4,092
Accrued commissions 482 441
- -------------------------------------------------------------------------------------
$ 11,083 $ 14,262
=====================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4
BANK LINE OF CREDIT AND NOTE PAYABLE
- --------------------------------------------------------------------------------
On December 30, 1998, the Company replaced its existing bank line of credit
with a $75,000,000 interim revolving credit facility. The credit facility is
secured by substantially all of the assets of the Company and bears interest
at the London Interbank Offering Rate ("LIBOR") plus a fixed interest margin.
Proceeds from the initial borrowing on the closing date were used to repay the
Company's existing indebtedness under a revolving loan agreement dated as of
February 4, 1998. The credit facility will be used to support working capital
and general corporate needs, including the issuance of letters of credit. As
of December 31, 1998, $2,951,000 of the credit facility remained available for
borrowings, including a reduction of $1,130,000 for outstanding letters of
credit. The credit facility requires the Company to maintain certain minimum
financial ratios including a fixed charge coverage ratio, as well as other
restrictive covenants.
On February 12, 1999, the Company consummated the amendment of its credit
facility to increase the facility to up to $120,000,000. Also effective on
February 12, 1999, the Company entered into an $80,000,000 accounts receivable
securitization (Note 16).
On 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 $56,000,000 of machinery and equipment. This lease
program is expected to commence during the second 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 fixed interest margin and is secured by the
underlying machinery and equipment and a corporate guarantee from the Company.
As of December 31, 1998, $12,971,000 was outstanding under this facility.
NOTE 5
GRANTOR STOCK TRUST
- --------------------------------------------------------------------------------
In July 1995, the Company established the Callaway Golf Company Grantor Stock
Trust (the "GST"). In conjunction with the formation of the GST, the Company
sold 4,000,000 shares of newly issued Common Stock to the GST at a purchase
price of $60,575,000 ($15.14 per share). In December 1995, the Company sold an
additional 1,300,000 shares of newly issued Common Stock to the GST at a
purchase price of $26,263,000 ($20.20 per share). The sale of these shares had
no net impact on shareholders' equity. During the term of the GST, shares in
the GST may be used to fund the Company's obligations with respect to one or
more of the Company's non-qualified or qualified employee benefit plans.
Shares owned by the GST are accounted for as a reduction to shareholders'
equity until used in connection with employee benefits. Each period, the
shares owned by the GST are valued at the closing market price, with
corresponding changes in the GST balance reflected in capital in excess of par
value.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6
EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
The schedule below summarizes the elements included in the calculation of
basic and diluted (loss) earnings per common share for the years ended
December 31, 1998, 1997 and 1996.
For the year ended December 31, 1998, all dilutive securities were excluded
from the calculation of diluted loss per share, as their effect would have
been antidilutive. For the years ended December 31, 1997 and 1996, 917,000 and
269,000 options, respectively, were excluded from the calculations, as their
effect would have been antidilutive.
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
- --------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Net (loss) income $(26,564) $132,704 $122,337
- --------------------------------------------------------------------------------------------------
Weighted-average shares outstanding:
Weighted-average shares outstanding - Basic 69,463 68,407 66,832
Dilutive securities 3,291 3,829
- --------------------------------------------------------------------------------------------------
Weighted average shares outstanding - Diluted 69,463 71,698 70,661
==================================================================================================
(Loss) earnings per common share
Basic $ (0.38) $ 1.94 $ 1.83
Diluted $ (0.38) $ 1.85 $ 1.73
</TABLE>
NOTE 7
STOCK OPTIONS AND RIGHTS
- --------------------------------------------------------------------------------
OPTIONS
The Company had the following fixed stock option plans, under which shares
were available for grant at December 31, 1998: the 1991 Stock Incentive Plan
(the "1991 Plan"), the 1995 Employee Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan"), the 1998 Stock Incentive Plan
(the "1998 Plan"), the Promotion, Marketing and Endorsement Stock Incentive
Plan (the "Promotion Plan") and the Non-Employee Directors Stock Option Plan
(the "Directors Plan").
The 1991 Plan, the 1996 Plan and the 1998 Plan permit the granting of
options or other stock awards to the Company's officers, employees and
consultants. Under the 1991 Plan, option prices may be less than the market
value at the date of grant, while under the 1996 Plan and the 1998 Plan
options may not be granted at option prices that are less than fair market
value at the date of grant. The 1995 Plan permits the granting of options or
other stock awards to only employees and consultants of the Company at option
prices that may be less than market value at the date of grant. The 1995 Plan
and the 1996 Plan were amended in 1998 to increase the maximum number of
options to acquire shares of Common Stock to 4,600,000 and 6,000,000 shares,
respectively.
During 1996 and 1995, the Company granted options to purchase shares to two
key officers, under separate plans, in conjunction with terms of their initial
employment (the "Key Officer Plans"). The 1990 Amended and Restated Stock
Option Plan (the "1990 Plan") permitted the granting of options to officers,
employees and consultants. No shares are available for grant under the Key
Officer Plans or the 1990 Plan.
Under the Promotion Plan, shares of Common Stock may be granted in the form
of options or other stock awards to golf professionals and other endorsers at
prices that may be less than the market value of the stock at the grant date.
The Directors Plan permits the granting of options to purchase shares of
Common Stock to Directors of the Company who are not employees, at prices
based on a non-discretionary formula, which currently may not be less than the
market value of the stock at the date of grant.
<PAGE>
The following table presents shares authorized, available for future grant and
outstanding under each of the Company's plans as of December 31, 1998:
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
Plan Authorized Available Outstanding
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1990 Plan 4,920 130
1991 Plan 10,000 38 3,447
Promotion Plan 3,560 738 1,211
1995 Plan 4,600 739 3,768
1996 Plan 6,000 2,195 3,805
1998 Plan 500 500
Key Officer Plans 1,100 820
Director Plan 840 92 456
- -------------------------------------------------------------------------------------------------------------
Total 31,520 4,302 13,637
=============================================================================================================
</TABLE>
Under the Company's stock option plans, outstanding options vest over
periods ranging from zero to five years from the grant date and expire up to
ten years after the grant date.
The following summarizes stock option transactions for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 11,257 $22.41 10,800 $15.03 9,842 $ 9.87
Granted 4,020 25.04 3,406 33.79 2,760 28.47
Exercised (441) 10.16 (2,877) 7.81 (1,775) 7.07
Canceled (1,199) 34.86 (72) 28.81 (27) 16.98
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 13,637 $22.62 11,257 $22.41 10,800 $15.03
Options exercisable at end of year 6,039 $17.78 3,453 $12.17 3,939 $ 8.83
- -----------------------------------------------------------------------------------------------------------------------------------
Price range of outstanding options $0.44 - $40.00 $0.44 - $40.00 $0.44 - $34.38
===================================================================================================================================
</TABLE>
The following tables summarize additional information about outstanding
stock options at December 31, 1998 and options and other stock awards granted
during 1998:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices (in thousands) Life-Years Exercise Price (in thousands) Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0 - $10 1,327 3.4 $ 3.21 1,249 $ 2.83
$10 - $25 4,602 4.5 $16.37 2,841 $14.82
$25 - $40 7,708 6.9 $29.68 1,949 $31.63
- -------------------------------------------------------------------------------------------------------------
$ 0 - $40 13,637 5.8 $22.62 6,039 $17.78
=============================================================================================================
</TABLE>
OPTIONS AND OTHER STOCK AWARDS GRANTED DURING 1998
<TABLE>
<CAPTION>
Number Weighted-Average
(in thousands) Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exercise price = market value 3,878 $25.88
Exercise price ** market value 5 $28.56
Exercise price * market value 137 $ 1.28
- -------------------------------------------------------------------------------------------------------------
4,020 $25.04
- -------------------------------------------------------------------------------------------------------------
</TABLE>
** Greater than
* Less than
<PAGE>
During 1998, the Company modified certain terms of 720,000 options held by
directors, certain officers and employees. These modifications, which largely
resulted from the Company's restructuring plan, included acceleration of
vesting and extension of expiration terms at the Company's discretion. At the
time of modification, the exercise prices of the options were in excess of the
then-current market price and accordingly, this action did not result in
compensation expense for the Company.
Also during 1998, the Company canceled 150,000 options held by non-employees
with option prices in excess of the then-current market price of the Company's
stock. The Company then reissued an equivalent number of options at the then-
current market price and extended certain expiration terms, and recorded the
related compensation expense of $71,000. An additional $195,000 was recorded in
unearned compensation, which will be amortized over the remaining vesting
periods.
RIGHTS
The Company has granted officers, consultants, and employees rights to receive
an aggregate of 826,800 shares of Common Stock for services or other
consideration. During 1998, 80,000 rights were exercised while none were
granted. At December 31, 1998, no rights to receive shares of Common Stock
remained outstanding. No rights were granted or exercised during 1997 or 1996.
The Company has a plan to protect shareholders' rights in the event of a
proposed takeover of the Company. Under the plan, each share of the Company's
outstanding Common Stock carries one right to purchase one one-thousandth of a
share of the Company's Series "A" Junior Participating Preferred Stock (the
"Right"). The Right entitles the holder, under certain circumstances, to
purchase Common Stock of Callaway Golf Company or of the acquiring company at a
substantially discounted price ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15% or more of the
Company's outstanding Common Stock. The Rights are redeemable by the Company at
$.01 per Right and expire in 2005.
RESTRICTED COMMON STOCK
During 1998, the Company granted 130,000 shares of Restricted Common Stock to
26 officers of the Company. Of these shares, 19,250 shares have been canceled.
The shares, which are restricted as to sale or transfer until vesting, will
vest on January 1, 2003. The related net compensation expense of $3,433,000 is
being recognized ratably over the vesting period, based on the difference
between the exercise price and market value of the stock on the measurement
date.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") whereby eligible
employees may purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or the last day of
each six month exercise period. Employees may authorize the Company to withhold
compensation during any offering period, subject to certain limitations. During
1997, the ESPP was amended to increase the maximum number of shares of the
Company's Common Stock that employees may acquire under this plan to 1,500,000
shares. During 1998, 1997 and 1996, the ESPP purchased approximately 386,000,
372,000 and 168,000 shares, respectively, of the Company's Common Stock. As of
December 31, 1998, 574,000 shares were reserved for future issuance.
COMPENSATION EXPENSE
During 1998, 1997, and 1996, the Company recorded $2,321,000, $2,041,000 and
$1,919,000, respectively, in compensation expense for certain options and
rights to purchase shares of Common Stock granted to employees and consultants
of the Company. The valuation of options and rights granted to non-employees is
estimated using the Black-Scholes option pricing model.
Unearned compensation has been charged for the value of options granted to
both employees and non-employees on the measurement date based on the valuation
methods described above. These amounts are amortized over the vesting period.
The unamortized portion of unearned compensation is shown as a reduction of
shareholders' equity in the accompanying consolidated balance sheet.
<PAGE>
- --------------------------------------------------------------------------------
PRO FORMA DISCLOSURES
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for employee awards under these plans, the
Company's net (loss) income and (loss) earnings per share would be changed to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, Year ended December 31,
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income:
As reported $(26,564) $132,704 $122,337
Pro forma $(46,847) $124,978 $113,587
(Loss) earnings per
common share:
As reported
Basic $ (0.38) $ 1.94 $ 1.83
Diluted $ (0.38) $ 1.85 $ 1.73
Pro forma
Basic $ (0.67) $ 1.83 $ 1.70
Diluted $ (0.67) $ 1.77 $ 1.59
================================================================================
</TABLE>
The pro forma amounts reflected above may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense as the options vest and additional options may be granted in future
years. The fair value of employee stock options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for the years ended December 31, 1998, 1997, and 1996,
respectively:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.9% 0.9% 0.9%
Expected volatility 42.0% 31.5% 31.5%
Risk free interest rates 4.66 - 4.72% 5.64 - 5.89% 5.32 - 7.66%
Expected lives 3 - 6 years 3 - 6 years 2 - 6 years
================================================================================
</TABLE>
The weighted-average grant-date fair value of options granted during 1998
was $9.88 per share. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of grants under
the Company's employee stock-based compensation plans.
NOTE 8
EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Company has a voluntary deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the
age and service requirements under the 401(k) Plan. Each participant may elect
to contribute up to 10% of annual compensation, up to the maximum permitted
under federal law, and the Company is obligated to contribute annually an
amount equal to 100% of the participant's contribution up to 6% of that
participant's annual compensation. Additionally, the Company can make
discretionary contributions based on the profitability of the Company. No
discretionary contributions were made for the years ended December 31, 1998 and
1997. For the year ended December 31, 1996, the Company recorded compensation
expense for discretionary contributions of $6,390,000. Employees contributed to
the 401(k) Plan $5,601,000, $5,384,000 and $3,315,000 in 1998, 1997 and 1996,
respectively. In accordance with the provisions of the 401(k) Plan, the Company
matched employee contributions in the amount of $4,673,000, $4,495,000 and
$1,988,000 during 1998, 1997 and 1996, respectively.
The Company also has an unfunded, nonqualified deferred compensation plan.
The plan allows officers and certain other employees of the Company to defer
all or part of their compensation, to be paid to the participants or their
designated beneficiaries upon retirement, death or separation from the Company.
For the years ended December 31, 1998, 1997 and 1996, the total participant
deferrals, which are reflected in long-term liabilities, were $908,000,
$1,166,000 and $2,564,000, respectively.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9
INCOME TAXES
- --------------------------------------------------------------------------------
The Company's (loss) income before income tax (benefit) provision was subject
to taxes in the following jurisdictions for the following periods:
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(34,555) $212,453 $193,170
Foreign (4,344) 1,312 2,425
- --------------------------------------------------------------------------------
$(38,899) $213,765 $195,595
================================================================================
The (benefit) provision for income taxes is as follows:
(in thousands) Year ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Current tax provision:
<S> <C> <C> <C>
United States $ 21,345 $ 66,462 $ 65,287
State 2,296 12,419 11,154
Foreign 250 1,150 1,244
Deferred tax (benefit) expense:
United States (31,173) 1,042 (3,911)
State (4,847) 50 (437)
Foreign (206) (62) (79)
- ---------------------------------------------------------------------------------------------------
Income tax (benefit)
provision $(12,335) $ 81,061 $ 73,258
===================================================================================================
</TABLE>
During 1998, 1997 and 1996, the Company recognized certain tax benefits
related to stock option plans in the amount of $3,068,000, $29,786,000 and
$14,244,000, respectively. Such benefits were recorded as a reduction of income
taxes payable and an increase in additional paid-in capital.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $36,229 $15,914
Depreciation and amortization 7,963 6,107
Deferred compensation 3,100 4,559
Effect of inventory overhead adjustment 4,062 1,555
Compensatory stock options and rights 2,327 1,589
State taxes, net 5
Foreign net operating loss carry forwards 1,074
Other 3,979 702
Restructuring charges
Long-lived asset impairment 1,755
Rental/lease arrangements 5,472
Estimated losses on assets held for disposal 4,335
Capital loss carryforward 685
Other 52
- -----------------------------------------------------------------------------------
Total deferred tax assets 71,033 30,431
Valuation allowance for deferred tax assets (1,759)
- -----------------------------------------------------------------------------------
Net deferred tax assets 69,274 30,431
Deferred tax liabilities:
State taxes, net of federal income tax benefit (2,608)
- -----------------------------------------------------------------------------------
Net deferred tax assets $66,666 $30,431
- -----------------------------------------------------------------------------------
</TABLE>
In 1998, the Company established a valuation allowance of $1,759,000 against
certain deferred tax assets, as the Company believes it is more likely than not
that such assets will not be realized. The Company expects to generate pre-tax
income in future years and accordingly, considers the deferred tax asset to be
realizable. The Company did not require a deferred tax asset valuation
allowance at December 31, 1997 or 1996.
<PAGE>
- --------------------------------------------------------------------------------
A reconciliation of income taxes computed by applying the statutory U.S.
income tax rate to the Company's (loss) income before income taxes to the
income tax (benefit) provision is as follows:
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amounts computed
at statutory U.S. tax rate $(13,615) $74,816 $68,458
State income taxes, net of
U.S. tax benefit (1,501) 8,105 6,966
Non-deductible foreign losses 1,226
Expenses with no tax benefit 1,064
Non-deductible capital losses 588
Other (97) (1,860) (2,166)
- ---------------------------------------------------------------------------------------
Income tax (benefit) provision $(12,335) $81,061 $73,258
=======================================================================================
</TABLE>
U.S. tax return examinations have been completed for the years through 1993.
The Company believes adequate provisions for income tax have been recorded for
all years.
NOTE 10
COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
In the normal course of business, the Company enters into certain long-term
purchase commitments with various vendors. As of December 31, 1998, the Company
has committed to purchase titanium golf clubheads costing approximately
$31,585,000, from one of its vendors. Under the current production schedule,
the clubheads are to be shipped to the Company during 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 December
31, 1998. However, management believes 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.
The Company leases certain warehouse, distribution and office facilities
under operating leases. Lease terms range from one to 15 years with options to
renew at varying terms. Commitments for minimum lease payments under non-
cancelable operating leases having initial or remaining non-cancelable terms in
excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------------------------
<S> <C>
1999 $ 4,084
2000 3,748
2001 3,870
2002 4,615
2003 2,827
Thereafter 16,508
- ----------------------------------------------------------------------------
$35,652
============================================================================
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$17,654,000, $1,760,000 and $1,363,000, respectively. Rent expense for 1998
includes $13,466,000 in excess lease costs related to the Company's
restructuring activities (Note 11).
NOTE 11
RESTRUCTURING
- --------------------------------------------------------------------------------
On November 11, 1998, the Company announced that it had adopted a business plan
that included a number of cost reduction actions and operational improvements.
These actions include: the consolidation of the operations of the Company's
wholly-owned subsidiary, 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 largely completed during 1999. As a result of these actions, the
Company recorded one-time charges of $54,235,000 during the fourth quarter of
1998. These charges (shown below in tabular format) primarily relate 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 the Company's 80% interest in CGMV (Note
15), a loss on the sale of All-American (Note 13), 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.
<PAGE>
- --------------------------------------------------------------------------------
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31,
1998, the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions will occur in the first quarter of 1999.
As part of this plan, the Company elected to consolidate its operations and
to sell certain of its buildings, which housed a portion of its manufacturing
and research and development activities. Other write-downs were recorded during
1998 for idle assets, assets whose manner of use had changed significantly and
equipment replaced as a result of capital improvements. The impaired assets
include buildings, building improvements, and machinery and equipment used in
certain of the Company's manufacturing and research and development
activities .
The projected future cash flows from these assets were less than the
carrying values of the assets. The carrying values of the assets held for sale
and the assets to be held and used were reduced to their estimated fair values
based on independent appraisals of selling values and values of similar assets
sold, less costs to sell. In 1998, the Company recorded losses from impairment
of assets of $12,634,000, which were recorded as a restructuring costs. The
Company expects to complete the dispositions in 1999. At December 31, 1998,
subsequent to the write-down for impairments, the carrying amount of the assets
held for disposal and assets to be held and used was $13,678,000 and
$4,582,000, respectively. Pursuant to SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of,"
assets to be held and used will continue to be depreciated, while assets held
for disposition will not. The Company does not expect that the effect on
depreciation will materially impact future results of operations.
Details of the one-time charges are as follows:
<TABLE>
<CAPTION>
Reserve
One-Time Balance
(in thousands) Cash/Non-Cash Charge Activity at 12/31/98
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Elimination of Job Responsibilities $11,664 $ 8,473 $ 3,191
Severance packages Cash 11,603 8,412 3,191
Other Non-cash 61 61
Exiting Certain Non-core Business Activities $28,788 $12,015 $16,773
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731
Excess lease costs Cash 12,660 146 12,514
Contract cancellation fees Cash 2,700 1,504 1,196
Other Cash 356 24 332
Consolidation of Operations $13,783 $ 2,846 $10,937
Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634
Excess lease costs Cash 806 4 802
Other Cash 613 112 501
================================================================================================================================
</TABLE>
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013.
NOTE 12
LITIGATION SETTLEMENT
- --------------------------------------------------------------------------------
On September 23, 1997, the Company settled a lawsuit brought against it and
certain officers of the Company by a former officer of the Company with the
payment of $12,000,000.
The Company filed suit against certain of its insurers and an insurance
agent seeking coverage for the costs of defending and settling the above
lawsuit (the "coverage litigation"). The insurance agent and one of the
Company's insurers have settled with the Company for an amount that was not
material. This settlement was recorded in general and administrative expenses
as a reduction of legal fees. The coverage litigation against the remaining
insurers has been unsuccessful to date because of court rulings that the claim
was not covered by the applicable insurance policies. The Company is appealing
the adverse coverage decision by the trial court. Although the Company believes
its appeal has merit, no assurance can be given that any additional costs will
be recovered.
<PAGE>
- -------------------------------------------------------------------------------
NOTE 13
ACQUISITIONS
- -------------------------------------------------------------------------------
During 1998, the Company acquired distribution rights and substantially all of
the assets from its distributors in Korea, Canada, France, Belgium, Norway and
Denmark, as well as the remaining 20% interest in Callaway Golf Trading GmbH
(Note 15), the results of which are consolidated in the results of Callaway
Golf (Germany) GmbH. The aggregate purchase price for these transactions was
$27,229,000, excluding the assumption and subsequent retirement of short-term
debt obligations of $10,373,000. The excess of the purchase price over net
assets acquired of $20,935,000 was allocated to goodwill and is being amortized
over estimated useful lives of three to 10 years. These acquisitions, along
with the acquisition of the remaining 80% interest in All-American (discussed
below) are not considered significant business combinations. Accordingly, pro
forma financial information is not presented.
In May 1998, the Company acquired for $4,526,000 the remaining 80% interest
in All-American, which operates a nine-hole golf course, performance center,
training facility and driving range located in Las Vegas, Nevada. On December
30, 1998, as part of its business plan to discontinue certain non-core business
activities, the Company sold its interest in All-American in exchange for
barter trade credits, which were recorded at the fair market value of the asset
exchanged. The Company recorded a loss on the disposition of this subsidiary of
$10,341,000 in December 1998 (Note 11).
On August 8, 1997, the Company consummated its acquisition of substantially
all of the assets and certain liabilities of Odyssey Sports, Inc., by its
wholly-owned subsidiary, Odyssey, subject to certain adjustments as of the time
of closing. Odyssey's results of operations have been included in the Company's
consolidated results of operations since August 8, 1997. Odyssey manufactures
and markets the Odyssey(R) line of putters and wedges with Stronomic(R) and
Lyconite(R) face inserts.
The cost to acquire substantially all of the assets and certain liabilities
of Odyssey Sports, Inc., including professional fees directly related to the
acquisition, was approximately $129,256,000 and has been accounted for using
the purchase method of accounting. The allocation of the acquisition cost to
assets acquired and liabilities assumed are summarized in the table that
follows. Amounts allocated to trade name, trademark, trade dress and goodwill
are being amortized on the straight-line basis over 40 years. The amounts
allocated to the process patent and covenant not to compete are being amortized
on the straight-line basis over 16 and three years, respectively.
<TABLE>
<CAPTION>
(in thousands) August 8, 1997
- -----------------------------------------------------------------
<S> <C>
Assets acquired/liabilities assumed:
Total assets acquired $132,591
Total liabilities assumed (3,335)
- -----------------------------------------------------------------
Net assets acquired $129,256
=================================================================
</TABLE>
The following unaudited pro forma net sales, net income and earnings per
share data for the years ended December 31, 1997 and 1996 are based on the
respective historical financial statements of the Company and Odyssey Sports,
Inc. The pro forma data presented for the year ended December 31, 1997 combines
the results of operations of the Company for the year ended December 31, 1997
with the results of operations of Odyssey Sports, Inc. for the ten months ended
August 7, 1997 and the results of Odyssey for the two months ended September
30, 1997 and assumes that the acquisition of substantially all of the assets
and certain liabilities of Odyssey Sports, Inc. occurred on January 1, 1997.
The pro forma data presented for the year ended December 31, 1996 combines the
results of operations of the Company for the year ended December 31, 1996 with
the results of operations of Odyssey Sports, Inc. for the year ended September
30, 1996 and assumes that the acquisition of substantially all the assets and
certain liabilities of Odyssey Sports, Inc. occurred on January 1, 1996.
The pro forma financial data presented are not necessarily indicative of the
Company's results of operations that might have occurred had the transaction
been completed at the beginning of the periods specified, and do not purport to
represent what the Company's consolidated results of operations might be for
any future period.
<TABLE>
<CAPTION>
(in thousands, Year ended December 31,
except per share data) (unaudited)
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $884,840 $711,715
- --------------------------------------------------------------------------------
Net income $134,512 $119,385
- --------------------------------------------------------------------------------
Earnings per common share
Basic $ 1.97 $ 1.79
Diluted $ 1.88 $ 1.69
================================================================================
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
NOTE 14
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 sales of 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. All Other segments, including interactive golf sites, golf book
publishing, new player development and a driving range venture, are aggregated
as they do not meet requirements for separate disclosure as set forth in SFAS
No. 131. In accordance with its restructuring plan, the Company is no longer
pursuing these initiatives (Note 11). There are no significant intersegment
transactions. The table below contains information utilized by management to
evaluate its operating segments.
<TABLE>
<CAPTION>
(in thousands)
1998 Golf Clubs Golf Balls All Other Consolidated
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $697,621 $697,621
Income (loss) before tax 9,182 $(22,426) $(25,655) (38,899)
Interest income 1,564 7 1,571
Interest expense (2,252) (419) (2,671)
Depreciation and amortization 34,121 1,072 692 35,885
Additions to long-lived assets 39,854 47,721 1,408 88,983
====================================================================================
<CAPTION>
1997 Golf Clubs Golf Balls All Other Consolidated
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $842,927 $842,927
Income (loss) before tax 222,771 $ (9,013) $ 7 213,765
Interest income 4,703 4,703
Interest expense (10) (10)
Depreciation and amortization 19,219 84 105 19,408
Additions to long-lived assets 166,461 10,263 823 177,547
====================================================================================
</TABLE>
The 1996 results for the Company's Golf Ball and All Other segments were not
material.
The Company markets its products domestically and internationally, with its
principal international markets being Asia and Europe. The table below contains
information about the geographical areas in which the Company operates.
Revenues are attributed to countries based on location in which the sale
originated, except as indicated below. Long-lived assets are based on the
country of domicile.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of Callaway(R) golf clubs
in Japan. Odyssey(R) brand products are sold through the Company's wholly-owned
Japanese subsidiary, ERC International Company. The distribution agreement
requires Sumitomo to purchase specified minimum quantities. The current
distribution agreement began in February 1993 and ends on December 31, 1999. In
1998, 1997, and 1996, sales to Sumitomo accounted for 8%, 10% and 9%,
respectively, of the Company's net sales.
<TABLE>
<CAPTION>
(in thousands)
1998 Sales Long-Lives Assets
- -----------------------------------------------------------------------------
<S> <C> <C>
United States (excluding exports) $ 437,628 $ 277,611
Japan* 61,460 857
United Kingdom 64,077 3,998
Other foreign countries 134,456 18,107
- -----------------------------------------------------------------------------
Total $ 697,621 $ 300,573
=============================================================================
<CAPTION>
1997 Sales Long-Lived Assets
- -----------------------------------------------------------------------------
<S> <C> <C>
United States (excluding exports) $ 547,256 $ 250,548
Japan* 84,634 61
United Kingdom 56,194 478
Other foreign countries 154,843 3,557
- -----------------------------------------------------------------------------
Total $ 842,927 $ 254,644
=============================================================================
<CAPTION>
1996 Sales Long-Lived Assets
- -----------------------------------------------------------------------------
<S> <C> <C>
United States (excluding exports) $ 460,611 $ 90,840
Japan (includes direct U.S. shipments) 58,156
United Kingdom 37,668 324
Other foreign countries 122,077 4,459
- -----------------------------------------------------------------------------
Total $ 678,512 $ 95,623
=============================================================================
</TABLE>
*Includes both sales from the Company's wholly-owned Japanese subsidiary, ERC
International, and direct U.S. shipments to Japan.
<PAGE>
- -------------------------------------------------------------------------------
NOTE 15
TRANSACTIONS WITH RELATED PARTIES
- -------------------------------------------------------------------------------
During 1998, the Company entered into an agreement with Callaway Editions, Inc.
to form CGMV, a limited liability company that is owned 80% by the Company and
20% by Callaway Editions, Inc. ("Callaway Editions"). Callaway Editions is a
publishing and media company which is owned 9% by Ely Callaway, Chairman and
Chief Executive Officer of the Company, and 81% by his son, Nicholas Callaway.
CGMV was formed to produce print and other media products that relate to the
game of golf. Pursuant to the agreement, the Company agreed to loan CGMV up to
$20,000,000 for working capital, subject to CGMV's achievement of certain
milestones to the satisfaction of the Company in its sole discretion. As of
December 31, 1998, the Company has loaned $2,034,000 to CGMV. Also pursuant to
the agreement, CGMV is obligated to pay an annual management fee of $450,000 to
Callaway Editions. In conjunction with the Company's implementation of its
business plan to reduce costs and exit certain non-core business activities,
the Company is currently in negotiations to sell or assign its interest in CGMV
to Callaway Editions. Accordingly, the Company recorded a charge in operations
to December 1998 based on the December 31, 1998 book value of CGMV (Note 11).
In December 1998, the Company purchased the remaining 20% interest in
Callaway Golf Trading GmbH, the Company's former German distributor, for
$6,766,000. The purchase price is in the form of a note payable bearing
interest at 7%, due in June 1999 to the seller, who is an officer of a wholly-
owned subsidiary of Company. The note payable is included in accounts payable
and accrued expenses at December 31, 1998.
- -------------------------------------------------------------------------------
NOTE 16
SUBSEQUENT EVENTS
- -------------------------------------------------------------------------------
DIVIDEND
On January 27, 1999, the Company declared a quarterly cash dividend of $0.07
per share payable on March 3, 1999, to shareholders of record on February 10,
1999.
BANK LINE OF CREDIT
On February 12, 1999, the Company consummated the amendment of its line of
credit to increase the revolving credit facility to up to $120,000,000 (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, except
domestic accounts receivable. 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. Also effective on February 12,
1999, the Company entered into an $80,000,000 accounts receivable
securitization facility (the "Accounts Receivable Facility"). The Accounts
Receivable Facility provides loan advances through the sale of substantially
all of the Company's eligible domestic accounts receivable. The Accounts
Receivable Facility includes a corporate guarantee by the Company and requires
the Company to meet the same financial covenants set forth in the Amended
Credit Agreement.
<PAGE>
Report of Independent Accountants
[LOGO APPEARS HERE]
To the Board of Directors and Shareholders of Callaway Golf Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Diego, California
January 26, 1999, except as to
Note 16, which is as of February 12, 1999
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) Fiscal Year 1998 Quarters
- ----------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $176,908 $233,251 $172,944 $114,518 $697,621
Gross profit $ 83,705 $108,790 $ 83,085 $ 20,434 $296,014
Net income (loss) $ 11,160 $ 21,137 $ 5,836 $(64,697) $(26,564)
Earnings (loss) per common share*
Basic $ 0.16 $ 0.30 $ 0.08 $ (0.93) $ (0.38)
Diluted $ 0.16 $ 0.30 $ 0.08 $ (0.93) $ (0.38)
================================================================================================================
<CAPTION>
Fiscal Year 1997 Quarters
- ----------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $169,073 $253,032 $257,435 $163,387 $842,927
Gross profit $ 87,002 $134,742 $138,769 $ 82,287 $442,800
Net income $ 24,466 $ 46,821 $ 37,049 $ 24,368 $132,704
Earnings per common share*
Basic $ 0.36 $ 0.69 $ 0.54 $ 0.35 $ 1.94
Diluted $ 0.34 $ 0.66 $ 0.52 $ 0.34 $ 1.85
================================================================================================================
</TABLE>
*Earnings per share is computed individually for each of the quarters presented;
therefore, the sum of the quarterly earnings per share will not necessarily
equal the total for the year.
MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY."
As of March 8, 1999, the approximate number of holders of record of the
Company's Common Stock was 9,645.
STOCK PRICE INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
- ---------------------------------------------------------------------------------------------
Period: High Low Dividend High Low Dividend
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $33.25 $26.50 $0.07 $33.63 $28.63 $0.07
Second Quarter $29.44 $17.94 $0.07 $38.13 $27.25 $0.07
Third Quarter $20.50 $ 9.56 $0.07 $38.38 $32.94 $0.07
Fourth Quarter $13.56 $ 9.81 $0.07 $36.38 $26.13 $0.07
=============================================================================================
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CALLAWAY GOLF COMPANY
-------------------------------------
<TABLE>
<CAPTION>
NAME JURISDICTION OF FORMATION
- ---- -------------------------
<S> <C>
Callaway Golf Ball Company California
Callaway Golf Sales Company California
CGV, Inc. California
Odyssey Golf, Inc. California
Callaway Golf Europe S.A. France
Callaway Golf (Germany) GmbH Germany
Callaway Golf Trading GmbH Germany
(owned 100% by Callaway Golf Germany GmbH)
Callaway Golf Europe Ltd. United Kingdom
(formerly Callaway Golf (UK) Limited)
ERC International Company Japan
Callaway Golf Korea, Ltd. Korea
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-77024) and
in the Registration Statements on Form S-8 (No. 33-85692, No. 33-50564, No. 33-
56756, No. 33-67160, No. 33-73680, No. 33-98750, No. 33-92302, No. 333-242, No.
333-5719, No. 333-5721, No. 333-24207, No. 333-27089, No. 333-27091, No. 333-
39093, No. 333-39095, and No. 333-61889) of Callaway Golf Company of our report
dated January 26, 1999, except as to Note 16, which is as of February 12, 1999,
appearing on page 38 of the Annual Report to Shareholders which is incorporated
in this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on Financial Statement Schedule, which appears on page
23 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AT DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL MATTERS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,618
<SECURITIES> 0
<RECEIVABLES> 83,405
<ALLOWANCES> 9,939
<INVENTORY> 186,040
<CURRENT-ASSETS> 323,606
<PP&E> 252,037
<DEPRECIATION> 79,243
<TOTAL-ASSETS> 655,827
<CURRENT-LIABILITIES> 184,008
<BONDS> 0
0
0
<COMMON> 751
<OTHER-SE> 452,345
<TOTAL-LIABILITY-AND-EQUITY> 655,827
<SALES> 697,621
<TOTAL-REVENUES> 697,621
<CGS> 401,607
<TOTAL-COSTS> 401,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,171
<INTEREST-EXPENSE> 2,671
<INCOME-PRETAX> (38,899)
<INCOME-TAX> (12,335)
<INCOME-CONTINUING> (26,564)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,564)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
