<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 Rutherford Road, Carlsbad, CA 92008-8815
(760) 931-1771
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
The number of shares outstanding of the Registrant's Common Stock, $.01
par value, as of April 30, 2000 was 76,860,495.
<PAGE>
CALLAWAY GOLF COMPANY
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at March 31, 2000
and December 31, 1999 3
Consolidated Condensed Statement of Operations for the three
months ended March 31, 2000 and 1999 4
Consolidated Condensed Statement of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Consolidated Condensed Statement of Shareholders' Equity for
the three months ended March 31, 2000 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Part II. Other Information 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
======================================================================================
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 68,628 $112,602
Accounts receivable, net (Note 4) 115,057 54,252
Inventories, net 110,140 97,938
Deferred taxes 32,148 32,558
Other current assets 11,764 13,122
- -------------------------------------------------------------------------------------
Total current assets 337,737 310,472
Property, plant and equipment, net 142,621 142,214
Intangible assets, net 118,055 120,143
Other assets 44,348 43,954
- -------------------------------------------------------------------------------------
$642,761 $616,783
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 53,906 $ 46,664
Accrued employee compensation and benefits 17,545 21,126
Accrued warranty expense 38,700 36,105
Accrued restructuring costs 928 1,379
Income taxes payable 3,217
- -------------------------------------------------------------------------------------
Total current liabilities 114,296 105,274
Long-term liabilities:
Deferred compensation 11,830 11,575
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000
shares authorized, none issued and
outstanding at March 31, 2000 and
December 31, 1999
Common Stock, $.01 par value, 240,000,000
shares authorized, 76,764,745 and
76,302,196 issued and outstanding at
March 31, 2000, and December 31, 1999,
respectively 768 763
Paid-in capital 301,171 307,329
Unearned compensation (2,345) (2,784)
Retained earnings 299,300 288,090
Accumulated other comprehensive income (109) 280
Less: Grantor Stock Trust (5,300,000 shares)
at market (82,150) (93,744)
- -------------------------------------------------------------------------------------
Total shareholders' equity 516,635 499,934
- -------------------------------------------------------------------------------------
$642,761 $616,783
=====================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
2000 1999
================================================================================
Net sales $206,608 100% $185,744 100%
Cost of goods sold 112,179 54% 102,224 55%
- --------------------------------------------------------------------------------
Gross profit 94,429 46% 83,520 45%
Operating expenses:
Selling 43,801 21% 31,300 17%
General and administrative 17,507 8% 21,728 12%
Research and development 8,217 4% 8,454 5%
- --------------------------------------------------------------------------------
Income from operations 24,904 12% 22,038 12%
Other income (expense) net 1,585 (771)
- --------------------------------------------------------------------------------
Income before income taxes 26,489 13% 21,267 11%
Provision for income taxes 10,283 8,444
- --------------------------------------------------------------------------------
Net income $ 16,206 8% $ 12,823 7%
================================================================================
Earnings per common share:
Basic $0.23 $0.18
Diluted $0.22 $0.18
Common equivalent shares:
Basic 71,199 69,977
Diluted 72,482 70,565
Dividends paid per share $0.07 $0.07
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
- ----------------------------------------------------------------------------------------------------------------------
2000 1999
======================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $16,206 $12,823
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,798 9,438
Loss on disposal of assets 264 339
Non-cash compensation 363 477
Tax benefit from exercise of stock options 477 56
Deferred taxes 669 1,114
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (60,468) 7,741
Inventories, net (12,072) 28,006
Other assets 616 (7,968)
Accounts payable and accrued expenses 7,083 4,330
Accrued employee compensation and benefits (3,624) 5,292
Accrued warranty expense 2,595 1,036
Income taxes payable 3,068 6,827
Accrued restructuring costs (451) (3,630)
Deferred compensation 255 1,014
Accrued restructuring costs - long term (426)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (35,221) 66,469
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (216) (673)
Capital expenditures (8,828) (31,581)
Sale of property and equipment 7 5,035
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,037) (27,219)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of Common Stock 5,040 2,378
Dividends paid (4,996) (4,918)
Proceeds from note payable 12,625
Line of credit, net (70,919)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 44 (60,834)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 240 (381)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (43,974) (21,965)
Cash and cash equivalents at beginning of period 112,602 45,618
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $68,628 $23,653
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE>
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings
<S> <C> <C> <C> <C> <C>
======================================================================================================================
Balance, December 31, 1999 76,302 $ 763 $ 307,329 $ (2,784) $ 288,090
- ----------------------------------------------------------------------------------------------------------------------
Exercise of stock options 271 3 3,064
Cancellation of Restricted Common Stock (3) (109) 109
Tax benefit from exercise of stock options 477
Compensatory stock and stock options 33 330
Employee stock purchase plan 195 2 1,971
Cash dividends (5,367)
Dividends on shares held by GST 371
Adjustment of GST shares to market value (11,594)
Equity adjustment from foreign currency translation
Net income 16,206
- ----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 76,765 $ 768 $ 301,171 $ (2,345) $ 299,300
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income GST Total Income
<S> <C> <C> <C> <C>
==============================================================================================================
Balance, December 31, 1999 $ 280 $ (93,744) $ 499,934
- --------------------------------------------------------------------------------------------------------------
Exercise of stock options 3,067
Cancellation of Restricted Common Stock
Tax benefit from exercise of stock Options 477
Compensatory stock and stock options 363
Employee stock purchase plan 1,973
Cash dividends (5,367)
Dividends on shares held by GST 371
Adjustment of GST shares to market value 11,594
Equity adjustment from foreign currency translation (389) (389) $ (389)
Net income 16,206 16,206
- --------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 $ (109) $ (82,150) $ 516,635 $ 15,817
===============================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying financial information for the three months ended March 31, 2000
and 1999 has been prepared by Callaway Golf Company (the "Company") and has not
been audited. These financial statements, in the opinion of management, include
all adjustments (consisting only of normal recurring accruals) necessary for the
fair presentation of the financial position, results of operations and cash
flows for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
Interim operating results are not necessarily indicative of operating results
for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the current
presentation.
2. INVENTORIES
-----------
March 31, December 31,
2000 1999
- ------------------------------------------------------------------------------
(Unaudited)
Inventories, net (in thousands):
Raw materials $ 51,889 $ 45,868
Work-in-process 2,175 1,403
Finished goods 68,454 65,661
- ------------------------------------------------------------------------------
122,518 112,932
Less reserve for obsolescence (12,378) (14,994)
- ------------------------------------------------------------------------------
$110,140 $ 97,938
==============================================================================
3. BANK LINE OF CREDIT
-------------------
The Company has a revolving credit facility of up to $120.0 million (the
"Amended Credit Agreement"). The Amended Credit Agreement is secured by
substantially all of the assets of the Company and expires in February 2004. The
Amended Credit Agreement bears interest at the Company's election at the London
Interbank Offering Rate ("LIBOR") plus a margin or the higher of the base rate
on corporate loans at large U.S. money center commercial banks (prime rate) or
the Federal Funds Rate plus 50 basis points. The Amended Credit Agreement
requires the Company to maintain certain minimum financial ratios including a
fixed charge coverage ratio, as well as other restrictive covenants. As of March
31, 2000, up to $118.6 million of the credit facility remained available for
borrowings (including a reduction of $1.4 million for outstanding letters of
credit), subject to meeting certain availability requirements under a borrowing
base formula and other limitations.
-7-
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Effective April 28, 2000, the Company entered into the First Amendment to the
Amended Credit Agreement which modified certain financial covenants and
restrictions relating to the Company's repurchase of shares of its Common Stock
(Note 10).
4. ACCOUNTS RECEIVABLE SECURITIZATION
----------------------------------
The Company's wholly-owned subsidiary, Callaway Golf Sales Company, sells trade
receivables on an ongoing basis to its wholly-owned subsidiary, Golf Funding
Corporation ("Golf Funding"). Pursuant to an agreement with a securitization
company (the "Accounts Receivable Facility"), Golf Funding, in turn, sells such
receivables to the securitization company on an ongoing basis, which yields
proceeds of up to $80.0 million at any point in time. Golf Funding's sole
business is the purchase of trade receivables from Callaway Golf Sales Company.
Golf Funding is a separate corporate entity with its own separate creditors,
which in the event of its liquidation will be entitled to be satisfied out of
Golf Funding's assets prior to any value in Golf Funding becoming available to
the Company. The Accounts Receivable Facility expires in February 2004.
Under the Accounts Receivable Facility, the receivables are sold at face value
with payment of a portion of the purchase price being deferred. As of March 31,
2000, no amount was outstanding under the Accounts Receivable Facility. Fees
incurred in connection with this facility for the three months ended March 31,
2000 and 1999 were $76,000 and $358,000, respectively. These fees were recorded
in other income (expense).
Effective April 28, 2000, the Company entered into the First Amendment to the
Accounts Receivable Facility, which modified certain financial covenants and
restrictions relating to the Company's repurchase of shares of its Common Stock
(Note 10).
5. EARNINGS PER SHARE
------------------
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share calculations for the three months ended March 31,
2000 and 1999 is presented below.
(in thousands, except per share data)
Three months ended
March 31,
(Unaudited)
- ----------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------
Net income $16,206 $12,823
============================================================================
Weighted-average shares outstanding:
Weighted-average shares outstanding - Basic 71,199 69,977
Dilutive securities 1,283 588
- ----------------------------------------------------------------------------
Weighted average shares outstanding - Diluted 72,482 70,565
============================================================================
Earnings per common share:
Basic $0.23 $0.18
Diluted $0.22 $0.18
For the three months ended March 31, 2000 and 1999, 9,498,000 and 13,255,000,
respectively, options outstanding were excluded from the calculations, as their
effect would have been antidilutive.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
At March 31, 2000, the Company is contingently liable for lease payments
totaling $6.6 million. This contingency is the result of the assignment of an
operating lease to a third party and expires in February of 2003.
-8-
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 March 31,
2000. Management believes, however, that the final resolution of these matters,
individually and in the aggregate, will not have a material adverse effect upon
the Company's annual consolidated financial position, results of operations or
cash flows.
7. RESTRUCTURING
-------------
During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc.
("Odyssey"), into the operations of the Company while maintaining the distinct
and separate Odyssey(R) brand image; the discontinuation, transfer or suspension
of certain initiatives not directly associated with the Company's core business,
such as the Company's involvement with interactive golf sites, golf book
publishing, new player development and a golf venue in Las Vegas; and the
re-sizing of the Company's core business to reflect current and expected
business conditions. The restructuring charges primarily related to: 1) the
elimination of job responsibilities, resulting in costs incurred for employee
severance; 2) the decision to exit certain non-core business activities,
resulting in losses on disposition of assets, as well as excess lease costs; and
3) consolidation of the Company's continuing operations resulting in impairment
of assets, losses on disposition of assets and excess lease costs. During 1999,
the Company completed its restructuring initiatives. At March 31, 2000, the
reserve balance of $0.9 million represents future cash outlays for excess lease
costs for a facility in New York City. The Company expects these cash outlays to
be completed by July 2000. The decrease in the reserve balance since December
31, 1999 of $0.5 million represents cash paid for excess lease costs. The
Company also has a contingent liability related to this facility (Note 6).
8. SEGMENT INFORMATION
-------------------
The Company's operating segments are organized on the basis of products and
include golf clubs and golf balls. The Golf Clubs segment consists of Callaway
Golf(R) titanium and stainless steel metal woods and irons, Callaway Golf(R) and
Odyssey(R) putters and wedges, and related accessories. The Golf Balls segment
consists of golf balls that are designed, manufactured, marketed and distributed
by the Company's wholly-owned subsidiary, Callaway Golf Ball Company. Beginning
January 1, 2000, management changed its method of allocating certain corporate
costs and other income (expense) used in evaluating segment income (loss) before
tax. As a result, certain amounts are attributable to neither segment in the
determination of its income (loss) before tax. Prior period amounts have been
reclassified to reflect the current allocation methodology. The table below
contains information utilized by management to evaluate its operating segments
for the interim period presented.
-9-
<PAGE>
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(unaudited)
2000 1999
============================================================================================================================
Additions to Additions to
Income (loss) long-lived Income (loss) long-lived
Net Sales before tax assets Net Sales before tax assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Golf Clubs $200,648 $51,859 $7,006 $185,744 $42,827 $ 4,014
Golf Balls 5,960 (14,584) 1,822 (6,939) 28,441
Reconciling Items(1) (10,786) (14,621)
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated $206,608 $26,489 $8,828 $185,744 $21,267 $32,455
============================================================================================================================
</TABLE>
(1) Represents corporate general and administrative expenses and other income
(expense) not utilized by management in determining segment profitability.
9. FOREIGN CURRENCY EXCHANGE CONTRACTS
-----------------------------------
During the three months ended March 31, 2000, the Company entered into forward
foreign currency exchange rate contracts to hedge payments due on intercompany
transactions from certain wholly-owned foreign subsidiaries and on certain
euro-denominated accounts receivable. The effect of this practice is to minimize
variability in the Company's operating results arising from foreign exchange
rate movements. The Company does not engage in foreign currency speculation.
These foreign exchange contracts do not subject the Company to risk due to
exchange rate movements because gains and losses on these contracts offset the
losses and gains on the transactions being hedged, and the Company does not
engage in hedging contracts which exceed the amount of the intercompany
transactions. At March 31, 2000, the Company had approximately $53.4 million of
foreign exchange contracts outstanding. The contracts mature between April and
December 2000. Gains and losses on the contracts are recorded in income. The net
realized and unrealized losses from foreign exchange contracts for the three
months ended March 31, 2000 and 1999 totaled approximately $327,000 and
$640,000, respectively.
10. SUBSEQUENT EVENTS
-----------------
Effective April 28, 2000, the Company amended its Amended Credit Agreement (Note
3) and its Accounts Receivable facility (Note 4). The amendments modified
certain financial covenants and restrictions relating to the Company's
repurchase of shares of its Common Stock.
On May 3, 2000, the Company announced that its Board of Directors authorized it
to repurchase its Common Stock in open market or in private transactions,
subject to the Company's assessment of market conditions and buying
opportunities from time to time, up to a maximum cost to the Company of $100.0
million. The Company announced that it could begin the repurchase program
immediately and expects to complete it by December 31, 2000, unless market
conditions change significantly or the program is terminated sooner by the Board
of Directors.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements used in this report 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. Actual results may differ
materially from those anticipated as a result of certain risks and
uncertainties, including but not limited to market acceptance of current and
future products, including its golf ball, seasonality, adverse market and
economic conditions, competitive pressures, and costs and potential disruption
of business as a result of the transition of the Company's Japanese distribution
to a wholly-owned subsidiary, delays, difficulties or increased costs in the
manufacturing of the Company's products, including its golf ball, or in the
procurement of materials needed to manufacture the Company's products, as well
as other risks and uncertainties detailed from time to time in the Company's
periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission. 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.
RESULTS OF OPERATIONS
Three-month periods ended March 31, 2000 and 1999
For the quarter ended March 31, 2000, net sales increased $20.9 million, or 11%,
to $206.6 million from $185.7 million in the prior year. The increase is
attributable to an increase in sales of stainless steel metal woods, irons and
initial sales of golf balls, partially offset by a decrease in sales of titanium
metal woods. The increase in sales of stainless steel metal woods was primarily
attributable to the January 2000 introduction of Steelhead Plus(TM) Stainless
Steel Metal Woods, which accounted for sales of $11.1 million more in the first
quarter of 2000 than its predecessor, Steelhead(TM) Stainless Steel Metal Woods,
did in the comparable quarter of 1999. The increase in sales of stainless steel
metal woods also is attributable to higher average revenue per club, as well as
an increase in units sold during this same period. The increase in sales of
irons of $34.5 million is primarily due to the January 2000 introduction of
Steelhead(TM) X-14(TM) Stainless Steel Irons and sales from Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons, which were introduced in September 1999. The dollar
increase in iron sales in the first quarter of 2000 vs. the first quarter of
1999 is also attributable to increases in both unit sales and average revenue
per club. The Company recorded initial sales of $6.0 million of its Rule 35(TM)
Golf Balls, which began shipping in significant quantities in March 2000.
In terms of net sales by region, sales in the United States and Europe increased
$17.2 million (17%) to $118.2 million and $6.4 million (22%) to $36.4 million,
respectively during the first quarter of 2000 vs. the first quarter of 1999.
Sales in Japan decreased $3.8 million (15%) to $21.2 million during this same
period, while sales in the Rest of Asia (including Korea) increased $1.8 million
(12%) to $16.3 million. Sales in the rest of the world decreased $0.8 million
(5%) to $14.5 million in the first quarter of 2000 from the comparable period of
1999.
For the first quarter of 2000, gross margin increased to $94.4 million from
$83.5 million in the first quarter of 1999, and as a percentage of net sales
increased to 46% from 45%. The increase is attributable to a substantial
increase in gross margin of golf club products to 50% of net sales in the first
quarter of 2000 from 45% of net sales in the comparable period of 1999,
partially offset by costs associated with manufacturing the Company's new golf
balls. The improved gross margin for golf club products in the first quarter of
2000 is due primarily to reductions in manufacturing labor and overhead expenses
and lower obsolescence charges than in the comparable period of 1999. Gross
margin on the Company's golf ball products during the first quarter of 2000 was
adversely affected by the write-off of certain early production of inventory
that did not meet the Company's quality standards, as well as lower than
expected plant utilization and production yields.
Selling expenses in the first quarter of 2000 increased to $43.8 million from
$31.3 million in the comparable period of 1999, or 21% and 17% of net sales,
respectively. The increase was primarily due to incremental expenses associated
with the launch of the Company's new Rule 35(TM) Golf Balls and with expanded
golf club sales through the Company's Japanese subsidiary. Prior to 2000,
Callaway Golf(R) products were sold in Japan through a third party distributor.
General and administrative expenses decreased to $17.5 million in the first
quarter of 2000 from $21.7 million in the comparable period of 1999, or 8% and
12% of net sales, respectively. This decrease is mainly attributable to the
shifting of costs associated with the Company's golf ball pre-production period.
The costs related to the commencement of production and the sale of golf balls
during the first quarter are now included in cost of goods sold.
Research and development expenses decreased to $8.2 million in the first quarter
of 2000 from $8.5 million in the first quarter of 1999, or 4% and 5% of net
sales, respectively. This decrease resulted primarily from lower depreciation
and overhead costs, partially offset by an increase in employee costs.
-11-
<PAGE>
Other income increased to $1.6 million in the first quarter of 2000 from an
expense of $0.8 million in the first quarter of 1999. The $2.4 million increase
is primarily attributable to lower interest expense, as the first quarter of
1999 reflects interest on the Company's line of credit and accounts receivable
securitization facilities, which were not utilized in the first quarter of 2000
(see Notes 3 and 4 to the unaudited Consolidated Condensed Financial
Statements), a decrease in foreign currency transaction losses and an increase
in interest income.
For the first quarter of 2000, the Company recorded a provision for income taxes
of $10.3 million and recognized a decrease in deferred taxes of $0.7 million.
The provision for income taxes as a percentage of income before taxes was 39%
and 40%, respectively for the three months ended March 31, 2000 and 1999 as
compared to 35% for the year ended December 31, 1999. During the fourth quarter
of 1999, the Company realized tax benefits related to non-taxable income from
insurance proceeds related to the Company's deferred compensation plan and the
reorganization of a foreign subsidiary that lowered the overall effective tax
rate for 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, cash and cash equivalents decreased to $68.6 million from
$112.6 million at December 31, 1999. This decrease primarily resulted from cash
used in operations of $35.2 million and cash used in investing activities of
$9.0 million. Cash used in operations reflected the build-up of inventory in
anticipation of the traditionally strong spring and summer selling seasons and
the increase of accounts receivable due to higher sales in the first quarter of
2000 than in the fourth quarter of 1999. Cash flows used in investing activities
resulted primarily from capital expenditures. Financing activities had almost no
net impact on cash flows during the first quarter of 2000 as proceeds received
from stock option exercises were offset by dividends paid during the period.
The Company's principal source of liquidity, both on a short-term and long-term
basis, has been cash flow provided by operations and the Company's credit
facilities. The Company currently expects this trend to continue. The Company
has a revolving credit facility for up to $120.0 million (the "Amended Credit
Agreement") and an $80.0 million accounts receivable securitization facility
(the "Accounts Receivable Facility") (see Notes 3 and 4 to the unaudited
Consolidated Condensed Financial Statements). During the first quarter of 2000,
the Company did not utilize either its Accounts Receivable Facility or its line
of credit under the Amended Credit Agreement. At March 31, 2000, the Company had
$118.6 million available, net of outstanding letters of credit, under the
Amended Credit Agreement, subject to meeting certain availability requirements
under a borrowing base formula and other limitations. Also at March 31, 2000,
there were no advances under the Accounts Receivable Facility, leaving up to
$80.0 million available under this facility.
As a result of the implementation of its plan to improve operating efficiencies
(see "Restructuring" below), the Company incurred charges of $54.2 million in
the fourth quarter of 1998. Of these charges, $25.5 million were estimated to be
non-cash. Since the adoption of this restructuring plan in the fourth quarter of
1998, the Company has made cash outlays for employee termination costs, contract
cancellation fees, excess lease costs and other expenses totaling $19.3 million,
of which $0.5 million occurred in 2000. As a result of the reversal of a portion
of certain restructuring reserves totaling $8.6 million during 1999, expected
future cash outlays for restructuring have been reduced and are estimated to be
$0.9 million. This amount is expected to be paid by July 2000 (see Note 7 to the
unaudited Consolidated Condensed Financial Statements). These cash outlays will
be funded by cash flows from operations and, if necessary, the Company's credit
facilities. If the actual actions taken by the Company differ from the plans on
which these estimates are based, actual losses recorded and resulting cash
outlays made by the Company could differ significantly.
Although the Company's golf club operations are mature and historically have
generated cash from operations, the Company's golf ball operations are in a
developmental stage and to date have not generated cash flows sufficient to
fund these operations. The Company does not expect that its golf ball operations
will generate sufficient cash to fund these operations for the remainder of
2000. However, 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 consolidated
operations, including purchase commitments, and planned capital expenditures,
for the foreseeable future through operating cash flows and its credit
facilities. There can be no assurance, however, that future industry specific or
other developments, or general economic trends, will not adversely affect the
Company's operations or its ability to meet its future cash requirements.
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RESTRUCTURING
During the fourth quarter of 1998, the Company recorded a restructuring charge
of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc.
("Odyssey"), into the operations of the Company while maintaining the distinct
and separate Odyssey(R) brand image; the discontinuation, transfer or suspension
of certain initiatives not directly associated with the Company's core business,
such as the Company's involvement with interactive golf sites, golf book
publishing, new player development and a golf venue in Las Vegas; and the
re-sizing of the Company's core business to reflect current and expected
business conditions. The restructuring charges primarily related to: 1) the
elimination of job responsibilities, resulting in costs incurred for employee
severance; 2) the decision to exit certain non-core business activities,
resulting in losses on disposition of assets, as well as excess lease costs; and
3) consolidation of the Company's continuing operations resulting in impairment
of assets, losses on disposition of assets and excess lease costs. During 1999,
the Company completed its restructuring initiatives. At March 31, 2000, the
reserve balance of $0.9 million represents future cash outlays for excess lease
costs for a facility in New York City. The Company expects these cash outlays to
be completed by July of 2000. The decrease in the reserve balance since December
31, 1999 of $0.5 million represents cash paid for excess lease costs. The
Company also has a contingent liability related to this facility (see Note 6 to
the unaudited Consolidated Condensed Financial Statements).
CERTAIN FACTORS AFFECTING CALLAWAY GOLF
Sales
Golf Clubs. The Company previously reported that it believed that the prior
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decline in the dollar volume of the premium golf club market may have
stabilized. The Company believes that there was growth in the premium golf club
market in the United States and abroad in the first quarter of 2000. There is no
assurance that the overall dollar volume of the premium golf club market will
grow, or that it will not decline, in the near future. Net sales of golf clubs
increased 8% to $200.6 million for the first quarter of 2000 compared to the
first quarter of 1999. There is no assurance, however, that future market
conditions will permit the Company to increase club sales further or even to
maintain current sales levels. The Company expects that the increase in club
sales will at least in part cannibalize sales for the third and fourth quarters.
In addition, in the first quarter of 2000, the Company made more golf clubs than
it had in any previous quarter, which helped it achieve the increased sales
levels for the quarter. If the Company were to experience delays, difficulties
or increased costs in its production of golf clubs, the Company's sales could be
adversely affected.
The Company's brands remained number one in the U.S. and the worldwide market
for woods, irons and putters in 1999 and first quarter of 2000. Sales of the
Company's Great Big Bertha(R) Hawk Eye(R) titanium metal woods (which were
released in January, 1999), and Hawk Eye(R) Tungsten Injected(TM) Titanium Irons
(which were released in September 1999) were strong during the first quarter of
2000. In addition, there has been exceptional market interest in the
introduction of the Company's new products, the Company's Big Bertha(R)
Steelhead Plus(TM) Drivers and Fairway Woods, Big Bertha(R) Steelhead(TM) X-
14(TM) Irons, and Odyssey(R) White Hot(TM) Putters. No assurances can be given,
however, 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.
Beginning January 1, 2000, the Company began selling Callaway Golf(R) products
through its wholly-owned Japanese subsidiary, Callaway Golf Kabushiki Kaisha
("Callaway Golf K.K."), instead of through its former distributor, Sumitomo
Rubber Industries, Ltd. ("Sumitomo"). The Company previously reported that there
would be a delay in the recording of revenues for sales in Japan as compared to
prior periods because revenue is now recorded upon sale to retailers and not
upon sale to Sumitomo. Sales in Japan declined 15% in the first quarter of 2000
from the comparable period of 1999.
In addition, the Sumitomo distribution agreement required that Sumitomo purchase
specific minimum quantities from the Company. As a direct distributor, the
Company will not have the benefit of these guaranteed minimum purchases going
forward. Furthermore, there is no assurance that the Company will be able to
transcend the cultural
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and other barriers to successful distribution in Japan or that its sales in
Japan will be comparable to or exceed its prior sales to Sumitomo.
Golf Balls. In 1996, the Company formed Callaway Golf Ball Company, a
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wholly-owned subsidiary of the Company, for the purpose of designing,
manufacturing and selling golf balls. In February 2000, the Company introduced
its new Rule 35(TM) Golf Balls. These golf balls are the product of more than
three years of research and development and are manufactured in a new facility
built by the Company for that purpose. The development of the Company's golf
ball business, by plan, has had a significant negative impact on the Company's
cash flows, financial position and results of operations and will continue to
affect the Company's performance in 2000. In fact, the pre-tax loss generated by
the Company's golf ball operations was $14.6 million in the first quarter of
2000 and the Company's golf ball operations could generate approximately $18 to
$22 million in additional pre-tax losses in the remaining three quarters of the
year.
Although initial demand for the Company's golf balls is promising, there is no
assurance that such demand will result in a proportionate amount of actual sales
or that consumers will enjoy the balls sufficiently to sustain future sales.
Moreover, the success of the Company's new golf ball business could be adversely
affected by various factors, including, among others, delays, difficulties or
increased costs in manufacturing or in distribution of the golf balls. To date,
the Company has experienced higher than expected production costs attributable
to yield and other ramp-up issues. The Company is aggressively seeking solutions
to these issues and expects production of the golf balls to increase as 2000
progresses. There is no assurance, however, that the Company will be able to
manufacture enough balls to meet demand or be able to achieve the operational or
sales efficiencies necessary to make its golf ball business profitable.
Consequently, there can be no assurance as to whether the golf ball will be
commercially successful or that a return on the Company's investment will
ultimately be realized. Furthermore, if these issues are not resolved
satisfactorily in a timely manner, the Company's results of operations, cash
flows and financial position will continue to be negatively affected.
Gross Margin
The Company's gross margin as a percentage of net sales increased to 46% in the
first quarter of 2000 from 45% in the first quarter of 1999. This increase was
primarily attributable to a reduction in golf club manufacturing labor and
overhead expenses, offset by higher than expected golf ball manufacturing costs,
including the unplanned write-off of certain golf ball inventory. In addition,
consumer acceptance of current and new product introductions, the sale and
disposal of non-current products at reduced sales prices, the sales mix of the
Company's high and low margin products and continuing pricing pressure from
competitive market conditions may have an adverse effect on the Company's future
sales and gross margin. The Company's margins also have been negatively affected
by its golf ball business, and the Company expects that its golf ball business
will continue to affect negatively its margins for the remainder of 2000. See
above "Certain Factors Affecting Callaway Golf Company--Sales."
Seasonality
In the golf club and golf ball industries, sales to retailers are generally
seasonal due to lower demand in the retail market in the cold weather months
covered by the Company's fourth and first quarters. The Company's golf club
business has generally followed this seasonal trend and the Company expects this
to continue generally for both its golf club and golf ball businesses. Although
the Company expects to realize operational improvements in its golf ball
business as 2000 progresses, expected normal seasonality will limit the positive
impact of any operational improvements in 2000. Unusual or severe weather
conditions such as the "El Nino" weather patterns experienced during the winter
of 1997-1998 may compound or otherwise distort these seasonal effects.
Competition
The worldwide market for premium golf clubs is highly competitive, and is served
by a number of well-established and well-financed companies with recognized
brand names, as well as new companies with popular products. New product
introductions and/or price reductions by competitors continue to generate
increased market competition. However, in the first quarter of 2000, as compared
to the first quarter of 1999, the Company maintained its unit and dollar market
share for woods and increased its unit and dollar market share for irons. While
the Company believes
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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 golf club manufacturer's ability to compete is in part dependent upon its
ability to satisfy the various subjective requirements of golfers, including the
golf club's look and "feel," and the level of acceptance that the golf club has
among professional and other golfers. The subjective preferences of golf club
purchasers may be subject to rapid and unanticipated changes. There can be no
assurance as to how long the Company's golf clubs will maintain market
acceptance.
The premium golf ball business is also highly competitive with a number of
well-established and well-financed competitors, including one competitor with an
estimated market share in excess of 50% of the premium golf ball business. 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.
Although initial sales of the Company's golf balls are promising, there can be
no assurance that the Company's golf balls will obtain the market acceptance
necessary to penetrate this established market.
New Product Introduction
The Company believes that the introduction of new, innovative golf clubs and
golf balls is 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, any new products that retail at a lower price than prior products may
negatively impact the Company's revenues unless unit sales increase.
New golf club and golf ball products generally seek to satisfy the standards
established by the United States Golf Association ("USGA") and the Royal and
Ancient Golf Club of St. Andrews ("R&A") because these standards are generally
followed by golfers within their respective jurisdictions. There is no assurance
that new designs will receive USGA and/or R&A approval, or that existing USGA
and/or R&A standards will not be altered in ways that adversely affect the sales
of the Company's products. 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 R&A announced in a Notice to Manufacturers sent on May 3, 2000
that it was considering a regulation that would specify minimum thicknesses for
the walls of a driver, including the face. Action on such a regulation could
happen as early as October 1, 2000. Currently, all of the Company's products are
believed to be "conforming" under the Rules of Golf as published by the R&A and
the USGA with the exception of the ERC(TM) Forged Titanium Driver ("ERC
Driver"), some lofts of which have been found by the USGA to be "non-
conforming." The ERC Driver is not marketed or sold by the Company in the United
States, and the Company does not promote its use by professionals or amateurs in
competitive events governed by the USGA's rules. Future actions by the USGA or
the R&A may impede the Company's ability to introduce new products and could
affect market acceptance of any new products which do not conform to current
USGA and R&A regulations. Such actions therefore could have a material adverse
effect on the Company's results of operations and cash flows.
Some countries, such as Japan and Canada, have local golf associations that
exert some control over the game of golf within their jurisdictions. On April
18, 2000, The Royal Canadian Golf Association ("RCGA") announced that the
Company's ERC Driver would be considered a "non-conforming club for all RCGA
sanctioned events." The Company has filed a lawsuit against the RCGA for
unfairly, improperly and unlawfully interfering with the commercial launch of
the ERC Driver. If the RCGA's action is not reversed, it could adversely affect
the acceptance of the ERC Driver in Canada. So far, no other local organization
within the R&A's general jurisdiction has deviated from the R&A's position and
ruled the ERC Driver "non-conforming."
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The Company's new products have tended to incorporate significant innovations in
design and manufacture, which have often resulted in higher prices for the
Company's products relative to other products in the marketplace. For example,
the Company's golf balls are premium golf balls and there are many lower priced
non-premium golf balls sold by others. There can be no assurance that a
significant percentage of the public will always be willing to pay such premium
prices for golf equipment or that the Company will be able to continue to design
and manufacture premium products that achieve market acceptance in the future.
The rapid introduction of new golf club or golf ball products by the Company
could result in close-outs of existing inventories at both the wholesale and
retail levels. Such close-outs can result in reduced margins on the sale of
older products, as well as reduced sales of new products, given the availability
of older products at lower prices. The Company experienced some of these effects
in 1999 with respect to golf clubs and could experience similar effects in
future years as the Company from time to time introduces new golf club or golf
ball products or misjudges demand.
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 Returns
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. While any breakage or
warranty problems are deemed significant to the Company, the incidence of clubs
returned to date has not been material in relation to the volume of Callaway
Golf(R) clubs that have been sold.
The Company monitors the level and nature of any golf club 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.
During the first quarter of 2000, the Company began selling its Rule 35(TM) Golf
Balls, the majority of which were sold in March. To date, the Company has not
experienced significant returns of its golf balls, and in light of the quality
control procedures implemented in the production of its golf balls, the Company
does not expect a significant amount of defective ball returns. If there were a
significant amount, however, it could have a material adverse effect upon its
golf ball business.
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<PAGE>
Credit Risk
The Company primarily sells its products to golf equipment retailers,
wholly-owned domestic and foreign subsidiaries and foreign distributors. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from these customers.
Historically, the Company's bad debt expense has been low. However, a downturn
in the retail golf equipment market, like the one experienced in 1998 and 1999,
primarily in the United States, could result in increased delinquent or
uncollectible accounts for some of the Company's significant customers. In
addition, the Company's transition in Japan from selling to one distributor to
selling directly to many retailers could increase the Company's delinquent or
uncollectible accounts. There can be no assurance that failure of the Company's
customers to meet their obligations to the Company will not adversely impact the
Company's results of operations, financial position or cash flows.
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 is also dependent on a limited number of suppliers for the materials
it uses to make its golf balls. Many of the materials, including the golf ball
cover, are customized for the Company. Any delay or interruption in such
supplies could have a material adverse impact upon the Company's golf ball
business. If the Company did experience any such delays or interruptions, there
is no assurance that the Company would be able to find adequate alternative
suppliers at a reasonable cost or without significant disruption to its
business.
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its U.S. customers. The Company is continually
reviewing alternative methods of ground shipping to supplement its use and
reduce its reliance on UPS. To date, a limited number of alternative vendors
have been identified and are being used 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 alloys and carbon fiber. The Company 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 always will 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 for golf clubs. 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
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<PAGE>
be adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration or 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 developed its new golf ball product, it
attempted to avoid infringing valid patents or other intellectual property
rights. Despite these attempts, it cannot be guaranteed that a competitor will
not assert and/or a court will not find that the new golf ball products infringe
any patent or other rights of competitors. If the new golf ball product is found
to infringe on protected technology, there is no assurance that the Company
would be able to obtain a license to use such technology, and it could incur
substantial costs to redesign its golf ball product and/or defend legal actions.
The Company has 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. While these efforts are taken seriously, 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" for 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(R) 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 the U.S. and abroad, it has not stopped such commerce.
Golf Professional Endorsements
The Company establishes relationships with professional golfers in order to
evaluate and promote Callaway Golf(R) and Odyssey(R) branded products. 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 Japan Golf Tour. While most professional golfers
fulfill their contractual obligations, some have been known to stop using a
sponsor's products despite contractual commitments. If certain of the Company's
professional endorsers were to stop using the Company's products contrary to
their endorsement agreements, the Company's business could be adversely affected
in a material way by the negative publicity.
Many professional golfers throughout the world use the Company's golf clubs even
though they are not contractually bound to do so and do not grant any
endorsement to the Company. The Company has created cash pools ("Pools") that
reward such usage. However, in 1999 and so far in 2000, as compared to 1998, the
Company significantly reduced these Pools for both Callaway Golf(R) and
Odyssey(R) brand products for the PGA and the Senior PGA Tours, and has
significantly reduced the Pools for Odyssey(R) brand products and eliminated the
Pools for Callaway Golf(R) brand products for the LPGA and buy.com (formerly
Nike) tours. The Company expects that the Pools for 2000 will be comparable to
1999. In addition, many other companies are aggressively seeking the patronage
of these professionals, and are offering many inducements, including specially
designed products and significant cash rewards. As a result, in 1999, usage of
the Company's drivers on the PGA, Senior PGA, LPGA and buy.com tours was
substantially reduced compared to 1998. This trend may continue in 2000.
In the past, the Company has experienced an exceptional level of driver
penetration on the world's five major professional tours, and the Company has
heavily advertised that fact. While it is not clear to what extent professional
usage contributes 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.
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<PAGE>
Many golf ball manufacturers, including the leading U.S. manufacturer of premium
golf balls, have focused a great deal of their marketing efforts on promoting
the fact that tour professionals use their balls. Some of these golf ball
competitors spend large amounts of money to secure professional endorsements,
and the market leader has obtained a very high degree of tour penetration. While
several of the Company's staff professionals have decided to use the Company's
golf balls in play, there are others who are already under contract with other
golf ball manufacturers or, for other reasons, may not choose to play the
Company's products. In addition, several professionals who are not on the
Company's staff have expressed an interest in playing the Company's ball, but it
is too early to predict if a significant number will actually do so. The Company
does not plan to match the endorsement spending levels of the leading
manufacturer in 2000, and will instead rely more heavily upon the performance of
the ball and other factors to attract professionals to the product. In the
future the Company may or may not increase its tour spending in support of the
golf ball. It is not clear to what extent use by professionals is important to
the commercial success of the Company's golf ball, but it is possible that the
results of the Company's golf ball business could be significantly affected by
its success or lack of success in securing acceptance on the professional tours.
International Distribution
The Company's management believes that controlling the distribution of its
products in certain major markets in the world has been and will be an element
in the future growth and success of the Company. The Company has reorganized a
substantial portion 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 continue to require the dedication of
management and other Company resources.
Additionally, the Company's plan to integrate 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. The integration of foreign distribution also
could result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the acquisition of some or all of the
Company's foreign distribution will be successful, and it is possible that an
attempt to do so will adversely affect the Company's business.
The Company previously appointed Sumitomo as the sole distributor of Callaway
Golf(R) clubs in Japan, through a distribution agreement that ended December 31,
1999. In 1999, 1998 and 1997, sales to Sumitomo accounted for 7%, 8% and 10%,
respectively, of the Company's net sales. In the fourth quarter of 1999, the
Company successfully completed negotiations with Sumitomo to provide a smooth
transition of its business. Effective January 1, 2000, the Company began
distributing Callaway Golf(R) brand products through Callaway Golf K. K., which
also distributes Odyssey(R) products and will also distribute Callaway Golf(TM)
balls. There are significant risks associated with the Company's intention to
effectuate distribution of Callaway Golf(R) products in Japan through Callaway
Golf K. K. rather than through Sumitomo. Some of these risks include increased
delinquent and uncollectible accounts now that the Company will be collecting
its receivables from many retailers as opposed to only one distributor.
Furthermore, the Company will no longer have the benefit of the minimum
purchases that Sumitomo was required to make. It is possible that these
circumstances could have a material adverse effect on the Company's operations
and financial performance.
Euro Currency
Many of the countries in which the Company sells its products are Member States
of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999, Member
States of the EMU have the option of trading in either their local currencies or
the euro, the official currency of EMU participating Member States. Parties are
free to choose the unit they prefer in contractual relationships until 2002 when
their local currencies will be phased out. The current version of the Company's
enterprise-wide business system does not support transactions denominated in
euro. The Company is in the process of upgrading its business systems to a more
current software release that will support transactions denominated in euro. The
Company intends to enable the euro functionality of its upgraded system no later
than its third quarter in 2001. Until such time as the upgrade has occurred and
the euro functionality has been enabled, transactions denominated in euro will
be processed manually. To date, the Company has not experienced,
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and does not anticipate in the near future, a large demand from its customers to
transact in euro. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of foreign currency fluctuations due to its
international operations and certain export sales. The Company is exposed to
both transactional currency/functional currency and functional
currency/reporting currency exchange rate risks. In the normal course of
business, the Company employs established policies and procedures to manage its
exposure to fluctuations in the value of foreign currencies. Pursuant to its
foreign exchange hedging policy, the Company may use forward foreign currency
exchange rate contracts to hedge certain firm commitments and the related
receivables and payables. During the first quarter of 2000, the Company entered
into such contracts on behalf of three of its wholly-owned subsidiaries,
Callaway Golf Europe Ltd., Callaway Golf K.K. and Callaway Golf Canada Ltd. The
Company also hedged certain euro-denominated accounts receivable during the
first quarter of 2000. The effect of this practice is to minimize variability in
the Company's operating results arising from foreign exchange rate movements.
These foreign exchange contracts generally do not subject the Company to risk
due to exchange rate movements because gains and losses on these contracts
offset losses and gains on the transactions being hedged, and the Company does
not engage in hedging contracts which exceed the amounts of these transactions.
Also pursuant to its foreign exchange hedging policy, the Company expects that
it also may hedge anticipated transactions denominated in foreign currencies
using forward foreign currency exchange rate contracts and put or call options.
Foreign currency derivatives will be used only to the extent considered
necessary to meet the Company's objectives and the Company does not enter into
forward contracts for speculative purposes. The Company's foreign currency
exposures include most European currencies, Japanese yen, Canadian dollars and
Korean won.
Additionally, the Company is exposed to interest rate risk from its Accounts
Receivable Facility and Amended Credit Agreement (see Notes 3 and 4 to the
Company's unaudited Consolidated Condensed Financial Statements) which are
indexed to the LIBOR and Redwood Receivables Corporation Commercial Paper Rate.
No amounts were advanced or outstanding under these facilities at March 31,
2000.
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 March 31, 2000 through its derivative financial instruments.
The sensitivity analysis model is a risk analysis tool and does not purport to
represent actual losses in earnings that will be incurred by the Company, nor
does it consider the potential effect of favorable changes in market rates. It
also does not represent the maximum possible loss that may occur. Actual future
gains and losses will differ from those estimated because of changes or
differences in market rates and interrelationships, hedging instruments and
hedge percentages, timing and other factors.
The estimated maximum one-day loss in earnings from the Company's
foreign-currency derivative financial instruments, calculated using the
sensitivity analysis model described above, is $5.7 million at March 31, 2000.
The Company believes that such a hypothetical loss from its derivatives would be
offset by increases in the value of the underlying transactions being hedged.
Notes 3 and 4 to the unaudited Consolidated Condensed Financial Statements
outline the principal amounts, if any, and other terms required to evaluate the
expected cash flows and sensitivity to interest rate changes.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, incident to its business activities, is often the
plaintiff in 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 or may initiate 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. Defendants in these actions may, among other things,
contest the validity and/or the enforceability of some of the Company's patents
and/or trademarks. Others may assert counterclaims against the Company. Based
upon the Company's experience, 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. 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 have a material adverse effect upon the Company's
annual consolidated financial position, results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits
--------
3.1 Certificate of Incorporation, incorporated herein by
this reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K, as filed with the
Securities and Exchange Commission (the "Commission")
on July 1, 1999 (file no. 1-10962).
3.2 Bylaws, incorporated herein by this reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K,
as filed with the Commission on July 1, 1999
(file no. 1-10962).
10.40 Second Amendment to Chairman and Founder Employment
Agreement, effective as of March 29, 2000, by and between
the Company and Mr. Callaway.(+)
10.41 First Amendment to Amended and Restated Credit Agreement,
dated as of April 28, 2000, by and among Callaway Golf
Company, the other credit parties signatory to the Credit
Agreement, the lenders signatory to this Amendment, and
General Electric Capital Corporation.(+)
10.42 First Amendment to Receivables Transfer Agreement, dated
as of April 28, 2000, among Callaway Golf Sales Company,
Callaway Golf Company and Golf Funding Corporation.(+)
27.1 Financial Data Schedule.(+)
b. Reports on Form 8-K
None
- -----------------------------
(+)Included with this Report.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: May 12, 2000 PRINCIPAL EXECUTIVE OFFICER:
/s/ Ely Callaway
------------------------------------
Ely Callaway
Chairman and Chief Executive Officer
ACTING PRINCIPAL FINANCIAL OFFICER:
/s/ Charles J. Yash
------------------------------------
Charles J. Yash
President
ACTING PRINCIPAL ACCOUNTING OFFICER:
/s/ Kenneth E. Wolf
------------------------------------
Kenneth E. Wolf
Senior Vice President, Finance
and Controller
-23-
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 Certificate of Incorporation, incorporated herein by
this reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K, as filed with the
Securities and Exchange Commission (the "Commission")
on July 1, 1999 (file no. 1-10962).
3.2 Bylaws, incorporated herein by this reference to Exhibit 3.2
to the Company's Current Report on Form 8-K, as filed with
the Commission on July 1, 1999 (file no. 1-10962).
10.40 Second Amendment to Chairman and Founder Employment Agreement,
effective as of March 29, 2000, by and between the Company
and Mr. Callaway.(+)
10.41 First Amendment to Amended and Restated Credit Agreement,
dated as of April 28, 2000, by and among Callaway Golf Company,
the other credit parties signatory to the Credit Agreement,
the lenders signatory to this Amendment, and General Electric
Capital Corporation.(+)
10.42 First Amendment to Receivables Transfer Agreement, dated as of
April 28, 2000, among Callaway Golf Sales Company, Callaway
Golf Company and Golf Funding Corporation.(+)
27.1 Financial Data Schedule.(+)
- -----------------------------
(+)Included with this Report.
-24-
<PAGE>
EXHIBIT 10.40
SECOND AMENDMENT TO
CHAIRMAN AND FOUNDER EMPLOYMENT AGREEMENT
This Second Amendment to Chairman and Founder Employment Agreement ("Second
Amendment") is effective as of March 29, 2000 by and between CALLAWAY GOLF
COMPANY, a Delaware corporation (the "Company") and ELY CALLAWAY ("Mr.
Callaway").
A. The Company and Mr. Callaway are parties to a certain Chairman and
Founder Employment Agreement entered into as of January 1, 1997 (the
"Agreement") and a First Amendment to Chairman and Founder Employment Agreement
effective December 31, 1999 (the "First Amendment").
B. The Company and Mr. Callaway are in negotiations regarding a new
employment agreement, and desire to keep the current Agreement in effect until
such time as a new employment agreement is finalized.
C. In light of the foregoing, the Company and Mr. Callaway desire to
amend the Agreement pursuant to Section 16 of the Agreement, in the manner set
forth herein.
NOW, THEREFORE, in consideration of the foregoing and other consideration,
the value and sufficiency of which are hereby acknowledged, the Company and Mr.
Callaway hereby agree as follows:
1. Section 1 of the Agreement is hereby amended to read as follows:
"TERM. The Company hereby employs Mr. Callaway and Mr. Callaway
----
hereby accepts employment pursuant to the terms and provisions of this
Agreement for the term commencing January 1, 1997 and terminating June
30, 2000, unless this Agreement is earlier terminated as hereinafter
provided. Unless such employment is earlier terminated, upon the
expiration of the term of this Agreement, Mr. Callaway's status shall
be one of at will employment."
2. But for the amendment contained herein, and any other written
amendments properly executed by the parties, the Agreement shall otherwise
remain unchanged.
IN WITNESS WHEREOF, the Company and Mr. Callaway have caused this
Second Amendment to be executed effective as of the date set forth above.
MR. CALLAWAY COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Ely Callaway By: /s/ Charles J. Yash
- ------------------------- -------------------------
Ely Callaway Charles J. Yash, President
Dated: March 29, 2000 Dated: March 29, 2000
<PAGE>
EXHIBIT 10.41
FIRST AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated
as of April 28, 2000 (this "Amendment") relates to that certain Amended and
---------
Restated Credit Agreement dated as of February 10, 1999 (as the same may be
amended, supplemented, restates or otherwise modified from time to time, the
"Credit Agreement") and is entered into among Callaway Golf Company, a Delaware
- -----------------
corporation (the "Borrower"), the other credit parties signatory to the Credit
--------
Agreement (together with the Borrower, the "Credit Parties"), the lenders
--------------
signatory hereto (the "Lenders") and General Electric Capital Corporation, a New
-------
York corporation, as agent for the Lenders (in such capacity, the "Agent").
-----
Capitalized terms used and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.
W I T N E S S E T H
WHEREAS, the Borrower, the other Credit Parties, Agent and the Lenders
have entered into the Credit Agreement;
WHEREAS, the Borrower and the other Credit Parties have requested that
the Agent and the Lenders amend the Credit Agreement to permit the repurchase of
shares of the Borrower's common Stock for cash in an aggregate amount of up to
$250,000,000;
WHEREAS, the Agent and the Lenders are willing to enter into such
amendments on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the above premises, the Borrower,
the other Credit Parties, the Agent and the Lenders agree as follows:
1. Amendments to the Credit Agreement. Upon the "Effective Date" (as
----------------------------------
defined in Section 3 below), the Credit Agreement is hereby amended as follows:
---------
a. Amendment to Section 6.14(e)(i). Section 6.14(e)(i) is hereby
-------------------------------
amended by deleting the text thereof in its entirety and substituting the
following in lieu thereof:
"Other than as notified to Agent on or before May 4, 2000 with respect
to repurchases of Stock in the Fiscal Quarter ending June 30, 2000,
Agent shall have received, on the first day of each Fiscal Quarter in
which a repurchase of Stock is planned, and, if any repurchase of
Stock not anticipated at the beginning of a Fiscal Quarter is planned
during that Fiscal Quarter, at least fifteen (15) Business Days prior
to any such proposed repurchase, (A) a schedule detailing any and all
Stock repurchases expected to occur during the current Fiscal Quarter,
prepared in conformity with clause (p) of Annex E, (b) a pro forma
-------
consolidated balance sheet, income statement and cash flow statement
of Borrower and
<PAGE>
its Subsidiaries, based on recent financial statements, which shall be
complete and shall fairly present in all material respects the assets,
liabilities, financial condition and results of operations of Borrower
and its Subsidiaries in accordance with GAAP consistently applied, but
taking into account such proposed payment and the funding of all Loans
in connection therewith, and such pro forma statements shall reflect
that the requirements of this clause (e) shall be satisfied and (C)
----------
a certificate of the chief financial officer of Borrower to the
effect that Borrower will be Solvent after the proposed payment and
that the pro forma statements fairly present the financial condition
of Borrower (on a consolidated basis) as of the date of the recent
financial statements after giving effect to the proposed payment,"
b. Amendment to Section 6.14(e)(iii). Section 6.14(e)(iii) is
---------------------------------
hereby amended by deleting the text thereof in its entirety and
substituting the following in lieu thereof:
"the aggregate amount paid after April 1, 2000 to (or on behalf of)
holders of Borrower's common Stock to repurchase such Stock shall not
exceed $250,000,000,"
c. Amendment to Section 6.14(e)(v). Section 6.14(e)(v) is hereby
-------------------------------
amended by deleting the phrase "90 days" and substituting in lieu thereof
the phrase "180 days".
d. Amendment to Section 6.14(e)(vii). Section 6.14(e)(vii) is
---------------------------------
hereby amended by deleting the text thereof in its entirety and
substituting the following in lieu thereof:
"all Stock repurchased pursuant to this clause (e) with proceeds of
----------
Indebtedness shall be immediately canceled and retired, and"
e. Amendment to Annex E. Annex E is hereby amended by adding the
--------------------
following reporting requirement to the end thereof:
"(p) Stock Repurchase Reports. To Agent and Lenders, within
------------------------
thirty (30) days after the end of each Fiscal Quarter, a schedule of
all Stock repurchases conducted during such Fiscal Quarter, describing
in detail with respect to each such repurchase, (i) the date of such
repurchase, (ii) the number of shares of Stock repurchased, and (iii)
the amounts paid to (or on behalf of) the holders of Stock to
repurchase such Stock."
f. Amendment to Annex H. Annex H is hereby amended by adding the
--------------------
following phrase to the end of subsection (a) thereof:
", less (iv) all cash paid after April 1, 2000 to (or on behalf of)
----
holders of the Borrower's common Stock pursuant to and subject to the
terms and conditions of Section 6.14(e)."
---------------
2
<PAGE>
2. Representations and Warranties. The Credit Parties hereby jointly and
------------------------------
severally represent and warrant to the Agent and the Lenders that, as of the
Effective Date and after giving effect to this Amendment:
a. All of the representations and warranties of the Credit Parties
contained in this Amendment, the Credit Agreement and the other Loan
Documents are true and correct in all material respects on and as of the
Effective Date, as if then made (other than representations and warranties
which expressly speak as of a different date, which shall be true and
correct in all material respects as of that date); and
b. No Default or Event of Default has occurred and is continuing or
will result after giving effect to this Amendment.
3. Effective Date. This Amendment shall become effective as of the date
--------------
first written above (the "Effective Date") upon the satisfaction of each of the
--------------
following conditions:
a. The Agent shall have received each of the following documents, in
each case in form and substance satisfactory to the Agent, prior to 5:00
p.m. (New York time) on May 15, 2000;
i. counterparts hereof executed by each of the Credit Parties,
the Agent and the Requisite Lenders;
ii. duly executed amendments to the CEF Lease Facility and the
Receivables Documents effecting all modifications necessary to permit
the repurchases of Stock described herein, together with a certificate
of the Chief Financial Officer of the Borrower certifying that all
conditions to the effectiveness of the amendments have been satisfied
and that the amendments are in full force and effect as of the
Effective Date;
iii. a certificate of the Secretary or Assistant Secretary of
each of the Credit Parties dated the Effective Date certifying (A)
that the bylaws of such Credit Party have not been amended or
otherwise modified since the date of the most recent certification
thereof by the Secretary or Assistant Secretary of such Credit Party
delivered to the Agent and remain in full force and effect as of the
Effective Date, (B) that the charter of such Credit Party has not been
amended or otherwise modified since the date of the most recent
certification thereof by the Secretary of State of such Credit Party's
jurisdiction of incorporation delivered to the Agent and remain in
full force and effect as of the Effective Date and (C) that the
execution, delivery and performance of this Amendment have been duly
authorized by all necessary or proper corporate and shareholder
action; and
iv. such additional documentation as the Agent may reasonably
request;
b. No law, regulation, order, judgment or decree of any Governmental
Authority shall, and the Agent shall not have received any notice that
litigation is pending or threatened which is likely to, enjoin, prohibit or
restrain the consummation
3
<PAGE>
of the transactions contemplated by this Amendment, except for such laws,
regulations, orders or decrees, or pending or threatened litigation, that
in the aggregate could not reasonably be expected to have a Material
Adverse Effect;
c. All of the representations and warranties of the Credit Parties
contained in this Amendment, the Credit Agreement and the other Loan
Documents shall be true and correct in all material respects on and as of
the Effective Date, as if then made (other than representations and
warranties which expressly speak as of a different date, which shall be
true and correct in all material respects as of that date);
d. All corporate and other proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Amendment shall be satisfactory in all respects in
form and substance to the Agent; and
e. No Default or Event of Default shall have occurred and be
continuing on the Effective Date or will result after giving effect to this
Amendment.
4. Reference to and Effect on the Loan Documents.
---------------------------------------------
a. Upon the Effective Date, each reference to the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import, and each
reference in the other Loan Documents to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as amended and supplemented
hereby.
b. Except to the extent specifically set forth herein, the respective
provisions of the Credit Agreement and the other Loan Documents shall not
be amended, modified, waived, impaired or otherwise affected hereby, and
such documents and the Obligations under each of them are hereby confirmed
as being in full force and effect.
c. This Amendment shall be limited solely to the matters expressly
set forth herein and shall not (i) constitute an amendment or waiver of any
other term or condition of the Credit Agreement or any other Loan Document,
(ii) prejudice any right or rights which the Agent or any Lender may now
have or may have in the future under or in connection with the Credit
Agreement or any other Loan Document, (iii) require the Agent or any Lender
to agree to a similar transaction on a future occasion or (iv) create any
right herein to another Person or other beneficiary or otherwise, except to
the extent specifically provided herein.
5. Miscellaneous. This Amendment is a Loan Document. The headings
-------------
herein are for convenience of reference only and shall not alter or otherwise
affect the meaning hereof.
6. Section Titles. The Section titles in this Amendment are and shall be
--------------
without substantive meaning or content of any kind whatsoever and are not a part
of the agreement between the parties hereto.
7. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and
4
<PAGE>
delivered shall be an original, but all of which shall together constitute one
and the same instrument.
8. GOVERNING LAW. THIS AMENDMENT, AND ALL MATTERS OF CONSTRUCTION,
-------------
VALIDITY AND PERFORMANCE HEREOF, SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
9. No Strict Construction. The parties hereto have participated jointly
----------------------
in the negotiation and drafting of this Amendment. In the event an ambiguity or
question of intent or interpretation arises, this Amendment shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Amendment.
5
<PAGE>
IN WITNESS WHEREOF, the Credit Parties, the Agent and the Lenders have
caused this Amendment to be executed by their respective officers thereunto duly
authorized as of the date first above written.
CALLAWAY GOLF COMPANY,
as Borrower
By: /s/ Kenneth Wolf
-----------------------------
Name: Kenneth Wolf
Title: Senior Vice President,
Finance and Controller
6
<PAGE>
CALLAWAY GOLF SALES COMPANY,
as a Credit Party
By: /s/ Kenneth Wolf
------------------------------
Name: Kenneth Wolf
Title: Vice President and
Chief Financial Officer
7
<PAGE>
CALLAWAY GOLF BALL COMPANY,
as a Credit Party
By: /s/ Kenneth Wolf
-------------------------------
Name: Kenneth Wolf
Title: Vice President and Chief
Financial Officer
8
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent and Lender
By: /s/ Robert Yasuda
----------------------------
Name: Robert Yasuda
Title: Authorized Signatory
Pro Rata Share: 20.8333%
9
<PAGE>
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO,
as a Lender
By: /s/ Elizabeth J. Limpert
---------------------------
Name: Elizabeth J. Limpert
Title: First Vice President
Pro Rata Share: 17.7083%
10
<PAGE>
BANK OF AMERICA, NATIONAL ASSOCIATION,
as a Lender
By: /s/ Richard G. Burke
----------------------------
Name: Richard G. Burke
Title: Senior Vice President
Pro Rata Share: 14.1667%
11
<PAGE>
CONGRESS FINANCIAL CORPORATION
(WESTERN),
as a Lender
By: /s/ Jeffrey M.Evans
-------------------------
Name: Jeffrey M. Evans
Title: Vice President
Pro Rata Share: 14.1667%
12
<PAGE>
KEY CORPORATE CAPITAL INC.,
as a Lender
By: /s/ Reynaldo Flores
--------------------------
Name: Reynaldo Flores
Title: Vice President
Pro Rata Share: 14.1667%
13
<PAGE>
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as a Lender
By: /s/ G.A. Godec
----------------------------
Name: G.A. Godec
Title: Senior Vice President
Pro Rata Share: 8.3333%
14
<PAGE>
NATIONAL WESTMINSTER BANK PLC,
as a Lender
By: /s/ Nicholas Reid
------------------------
Name: Nicholas Reid
Title:
Pro Rata Share: 10.625%
15
<PAGE>
EXHIBIT 10.42
FIRST AMENDMENT
TO
RECEIVABLES TRANSFER AGREEMENT
THIS FIRST AMENDMENT TO RECEIVABLES TRANSFER AGREEMENT, dated as of
April 28, 2000 (this "Amendment") is entered into among Callaway Golf Sales
---------
Company, a California corporation ("CGS"), as transferor of Receivables (the
---
"CGS Originator") and as a servicer (the "Servicer"), Callaway Golf Company, a
- --------------- --------
Delaware corporation (the "Parent Guarantor") and Golf Funding Corporation, a
----------------
California corporation ("GFC"), and relates to that certain Receivables Transfer
---
Agreement dated as of February 10, 1999 among CGS, the Parent Guarantor and GFC
(as the same may be amended, supplemented, restated or otherwise modified from
time to time, the "Receivables Transfer Agreement"). Capitalized terms used and
------------------------------
not otherwise defined herein shall have the meanings assigned to them in the
Receivables Transfer Agreement.
W I T N E S S E T H
WHEREAS, the CGS Originator, the Parent Guarantor and GFC have entered
into the Receivables Transfer Agreement;
WHEREAS, the Parent Guarantor and General Electric Capital Corporation
(the "Agent"), inter alia, have entered into that certain Amended and Restated
-----
Credit Agreement dated as of February 10, 1999, as amended by the First
Amendment to Amended and Restated Credit Agreement dated as of April 28, 2000
(the "First Amendment to Credit Agreement") (as amended by the First Amendment
-----------------------------------
to Credit Agreement, and as it may be further amended, supplemented, restated or
otherwise modified from time to time, the "Credit Agreement");
----------------
WHEREAS, pursuant to the First Amendment to Credit Agreement, the
Parent Guarantor and the other Credit Parties (as defined therein) have
requested that the Agent and the Lenders (as defined therein) amend the Credit
Agreement to amend the Restricted Payment and Tangible Net Worth covenants
contained therein to permit the repurchase of shares of the Parent Guarantor's
common Stock for cash in an aggregate amount of up to $250,000,000, subject to
the terms and conditions described in the Credit Agreement (the "Stock
-----
Repurchases");
- -----------
WHEREAS, the Parent Guarantor and the CGS Originator have requested
that GFC amend the Receivables Transfer Agreement to amend the Restricted
Payment and Tangible Net Worth covenants contained therein to permit the Stock
Repurchases, and GFC is willing to enter into such amendments on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the above premises, the CGS
Originator, the Parent Guarantor and GFC agree as follows:
1. Amendments to the Receivables Transfer Agreement. Upon the
------------------------------------------------
"Effective Date" (as defined in Section 3 below), the Receivables Transfer
---------
Agreement is hereby amended as follows:
<PAGE>
a. Amendment to Section 4.05(a). Section 4.05(a) is hereby amended
----------------------------
by deleting the words "Other than as expressly permitted by the Credit
Agreement as in effect on the date hereof," and substituting the following
in lieu thereof:
"Other than as expressly permitted by the Credit Agreement as in
effect on the date hereof, as amended by the First Amendment to
Amended and Restated Credit Agreement dated as of April 28, 2000 (the
"First Amendment to Credit Agreement"), "
-----------------------------------
b. Amendment to Annex W. Annex W is hereby amended by adding the
--------------------
following phrase to the end of subsection (a) thereof:
", less (iv) all cash paid after April 1, 2000 to (or on behalf of)
----
holders of the Parent Guarantor's common Stock pursuant to and subject
to the terms and conditions set forth in Section 6.14(e) of the Credit
Agreement, as amended by the First Amendment to Credit Agreement."
2. Representations and Warranties. The CGS Originator and the Parent
------------------------------
Guarantor hereby represent and warrant to GFC that, as of the Effective Date and
after giving effect to this Amendment:
a. All of the representations and warranties of each of the CGS
Originator and the Parent Guarantor contained in this Amendment and the
Receivables Transfer Agreement are true and correct in all material
respects on and as of the Effective Date, as if then made (other than
representations and warranties which expressly speak as of a different
date, which shall be true and correct in all material respects as of that
date); and
b. No Incipient Termination Event or Termination Event has occurred or
is continuing or will result after giving effect to this Amendment.
3. Effective Date. This Amendment shall become effective as of the date
--------------
first written above (the "Effective Date") upon the satisfaction of each of the
--------------
following conditions:
a. GFC shall have received each of the following documents, in each
case in form and substance satisfactory to GFC, prior to 5:00 p.m. (New
York time) on May 15, 2000;
i. counterparts hereof executed by each of the CGS Originator,
the Parent Guarantor, the Collateral Agent, the Operating Agent and
the Purchaser (as required pursuant to Section 8.06 of the Receivables
Transfer Agreement);
ii. a certificate of the Secretary or Assistant Secretary of each
of the CGS Originator and the Parent Guarantor dated the Effective
Date certifying (A) that the bylaws of such party have not been
amended or
2
<PAGE>
otherwise modified since the date of the most recent certification
thereof by the Secretary or Assistant Secretary of such party
delivered to GFC and remain in full force and effect as of the
Effective Date, (B) that the charter of such party has not been
amended or otherwise modified since the date of the most recent
certification thereof by the Secretary of State of such party's
jurisdiction of incorporation delivered to GFC and remain in full
force and effect as of the Effective Date and (C) that the execution,
delivery and performance of this Amendment have been duly authorized
by all necessary or proper corporate and shareholder action; and
iii. such additional documentation as GFC may reasonably request;
and
b. No law, regulation, order, judgment or decree of any Governmental
Authority shall, and GFC shall not have received any notice that litigation
is pending or threatened which is likely to, enjoin, prohibit or restrain
the consummation of the transactions contemplated by this Amendment, except
for such laws, regulations, orders or decrees, or pending or threatened
litigation, that in the aggregate could not reasonably be expected to have
a Material Adverse Effect.
4. Reference to and Effect on the Receivables Transfer Agreement.
-------------------------------------------------------------
a. Upon the Effective Date, each reference to the Receivables
Transfer Agreement to "this Agreement", "hereunder", "hereof" or words of
like import, shall mean and be a reference to the Receivables Transfer
Agreement as amended and supplemented hereby.
b. Except to the extent specifically set forth herein, the provisions
of the Receivables Transfer Agreement shall not be amended, modified,
waived, impaired or otherwise affected hereby, and the Receivables Transfer
Agreement and the Obligations under the Receivables Transfer Agreement are
hereby confirmed as being in full force and effect.
c. This Amendment shall be limited solely to the matters expressly
set forth herein and shall not (i) constitute an amendment or waiver of any
other term or condition of the Receivables Transfer Agreement or any other
document, (ii) prejudice any right or rights which GFC may now have or may
have in the future under or in connection with the Receivables Transfer
Agreement or any other document, (iii) require GFC to agree to a similar
transaction on a future occasion or (iv) create any right herein to another
Person or other beneficiary or otherwise, except to the extent specifically
provided herein.
5. Section Titles and Headings. The Section titles in this Amendment
---------------------------
are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto. The headings
herein are for convenience of reference only and shall not alter or otherwise
affect the meaning hereof.
6. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
3
<PAGE>
7. GOVERNING LAW. THIS AMENDMENT, AND ALL MATTERS OF CONSTRUCTION,
-------------
VALIDITY AND PERFORMANCE HEREOF, SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
8. No Strict Construction. The parties hereto have participated jointly
----------------------
in the negotiation and drafting of this Amendment. In the event an ambiguity or
question of intent or interpretation arises, this Amendment shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Amendment.
* * *
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
date first above written.
CALLAWAY GOLF SALES COMPANY,
as CGS Originator and as Servicer
By: /s/ Kenneth Wolf
----------------------------------
Name: Kenneth Wolf
Title: Vice President and Chief
Financial Officer
GOLF FUNDING CORPORATION
By: /s/ Kenneth Wolf
----------------------------------
Name: Kenneth Wolf
Title: Vice President and Chief
Financial Officer
CALLAWAY GOLF COMPANY,
as Parent Guarantor
By: /s/ Kenneth Wolf
----------------------------------
Name: Kenneth Wolf
Title: Vice President and Chief
Financial Officer
ACKNOWLEDGED AND AGREED:
-----------------------
GENERAL ELECTRIC CAPITAL CORPORATION,
as Collateral Agent and Operating Agent
By: /s/ Craig Winslow
----------------------------------
Name: Craig Winslow
Title: Authorized Signatory
REDWOOD RECEIVABLES CORPORATION,
as Purchaser
By: /s/ Denis M. Creedon
----------------------------------
Name: Denis M. Creedon
Title: Assistant Secretary
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY
GOLF COMPANY UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET AND UNAUDITED
CONSOLIDATED CONDENSED STATEMENT OF INCOME AT MARCH 31, 2000 AND FOR THE THREE
MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 68,628
<SECURITIES> 0
<RECEIVABLES> 120,292
<ALLOWANCES> 5,235
<INVENTORY> 122,518
<CURRENT-ASSETS> 337,737
<PP&E> 250,519
<DEPRECIATION> 107,898
<TOTAL-ASSETS> 642,761
<CURRENT-LIABILITIES> 114,296
<BONDS> 0
0
0
<COMMON> 768
<OTHER-SE> 515,867
<TOTAL-LIABILITY-AND-EQUITY> 642,761
<SALES> 206,608
<TOTAL-REVENUES> 206,608
<CGS> 112,179
<TOTAL-COSTS> 112,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 121
<INTEREST-EXPENSE> 391
<INCOME-PRETAX> 26,489
<INCOME-TAX> 10,283
<INCOME-CONTINUING> 16,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,206
<EPS-BASIC> $0.23
<EPS-DILUTED> $0.22
</TABLE>
