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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number ____________
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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $.01 par value per share New York Stock Exchange
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
As of March 6, 2000, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $1,014,160,323 based on the
closing sales price of the Registrant's Common Stock as reported on the New York
Stock Exchange. Such amount was calculated by excluding all shares held by
directors and executive officers without conceding that all such persons are
"affiliates" of the Registrant for purposes of the federal securities laws.
As of March 24, 2000, the number of shares of the Registrant's Common Stock
outstanding was 76,746,245, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV incorporate certain information by reference from the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999.
Certain of the information required by Part III is incorporated by
reference from the Registrant's definitive Proxy Statement for the annual
meeting of shareholders to be held on May 3, 2000, as filed with the Commission
on March 29, 2000 pursuant to Regulation 14A, which information is incorporated
herein by reference.
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Note: 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. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers also are urged to
review and consider carefully the various disclosures made by the Company in
Part I of this report which describe certain factors which affect the Company's
business, as well as the Company's other periodic reports on Form 10-Q and
Current Reports on Form 8-K filed with the Securities and Exchange Commission.
Readers also should be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Reports issued by securities analysts are not the
responsibility of the Company and shareholders should not assume that the
Company agrees with any report issued by any analyst or with any statements,
projections, forecasts or opinions contained in such report.
PART I
Item 1. Business.
Callaway Golf Company (the "Company" or "Callaway Golf") was incorporated
in California in 1982 and reincorporated in Delaware on July 1, 1999. The
Company has the following direct wholly-owned operating subsidiaries: Callaway
Golf Sales Company, Callaway Golf Ball Company, CGV, Inc., Callaway Golf Europe
Ltd., Callaway Golf K.K. (formerly ERC International Company), Callaway Golf
Korea Ltd., Callaway Golf (Germany) GmbH and Callaway Golf Canada Ltd. The
Company, together with its subsidiaries, designs, develops, manufactures and
markets high quality, innovative golf clubs and golf balls.
The Company's golf clubs are sold at premium prices to both average and
skilled golfers on the basis of performance, ease of use and appearance.
Callaway Golf's primary golf club products, most of which incorporate the
Company's S2H2(R) design concept, currently include Great Big Bertha(R) Hawk
Eye(R) Titanium Metal Woods and Tungsten Injected(TM) Titanium Irons, Big
Bertha(R) Steelhead Plus(TM) Stainless Steel Metal Woods and Steelhead(TM) X-
14(TM) Stainless Steel Irons, and Bobby Jones(R) and Carlsbad Series(TM)
Putters. Callaway Golf Company also makes and sells Odyssey(R) Putters and
Wedges with Stronomic(R) and Lyconite(R) inserts, including the Dual Force(R)
and TriForce(TM) Putters, and also the White Hot(TM) Putter with an insert
composed of the Rule 35(TM) golf ball cover material.
Callaway Golf Ball Company launched its Rule 35(TM) Firmfeel(TM) and
Softfeel(TM) Golf Balls on February 4, 2000. These balls are sold in the
premium golf ball market to both average and skilled golfers on the basis of
performance and appearance. Both the Firmfeel(TM) and Softfeel(TM) balls are
designed to provide complete performance. Golfers will choose between the two
balls based upon their subjective preference for a firmer or softer feeling golf
ball.
Segments
Information regarding the Company's segments is contained in Note 15 to the
Consolidated Financial Statements ("Consolidated Financial Statements") in the
Company's Annual Report to Shareholders for the year ended December 31, 1999
("1999 Annual Report to Shareholders"), which note is incorporated herein by
reference.
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., into
the operations of the Company while maintaining the distinct and separate
Odyssey(R) brand; the discontinuation, transfer or suspension of certain
initiatives not directly associated with the Company's core business, such as
the Company's involvement with interactive golf sites, golf book publishing, new
player development and a golf venue in Las Vegas; and the re-sizing of the
Company's core business to reflect current and expected business conditions.
These initiatives were completed during 1999, with the exception of cash outlays
related to the assignment of a lease obligation for a facility in New York City
that will continue through July 2000. The restructuring charges (shown below in
tabular format) primarily related to: 1) the elimination of job
responsibilities, resulting in costs incurred for employee severance; 2) the
decision to exit certain non-core business activities, resulting in losses on
disposition of the Company's 80% interest in Callaway Golf Media Ventures (see
Note 14 to the Consolidated Financial Statements), a loss on the sale of the
business of All-American Golf LLC (see Note 14 to the Consolidated Financial
Statements), as well as excess lease
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costs; and 3) consolidation of the Company's continuing operations resulting in
impairment of assets, losses on disposition of assets and excess lease costs.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31, 1998,
the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions occurred in the first quarter of 1999.
Details of the one-time charge are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
Cash/ One-Time Balance Balance
Non-Cash Charge Activity at 12/31/98 Activity(1) at 12/31/99
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Elimination of Job Responsibilities $11,664 $ 8,473 $ 3,191 $ 3,191
Severance packages Cash 11,603 8,412 3,191 3,191
Other Non-cash 61 61
Exiting Certain Non-Core Business $28,788 $12,015 $16,773 $15,394 $ 1,379
Activities
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,731
Excess lease costs Cash 12,660 146 12,514 11,135(2) 1,379
Contract cancellation fees Cash 2,700 1,504 1,196 1,196
Other Cash 356 24 332 332
Consolidation of Operations $13,783 $ 2,846 $10,937 $10,937
Loss on impairment/disposition of Non-cash 12,364 2,730 9,634 9,634(3)
assets
Excess lease costs Cash 806 4 802 802(4)
Other Cash 613 112 501 501
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</TABLE>
(1) Includes reversal of reserve totaling $8.6 million, as actual amounts
differed from estimates. Significant reversals are noted below in (2)
through (4).
(2) Includes reversal of $6.1 million of reserve due to the assignment of lease
obligation at terms significantly more favorable than estimated at the
establishment of the reserve.
(3) Includes reversal of $1.5 million of reserve related to disposition of two
buildings at higher sales prices than estimated.
(4) Includes reversal of $491,000 of reserve due to the sublease of a facility
at terms more favorable than estimated at the establishment of the reserve.
During 1999, the Company incurred charges of $1.3 million on the
disposition of building improvements eliminated during the consolidation of
manufacturing operations, as well as other charges of $671,000. These charges
did not meet the criteria for accrual in 1998. Additionally, the Company
incurred charges of $749,000 related to asset dispositions and other
restructuring activities for which reserves were not established in 1998. Future
cash outlays are anticipated to be completed by July 2000.
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Products
The following table sets forth the contribution to net sales attributable
to the product groups for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
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1999 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
Metal Woods $429,011 60% $389,900 56% $544,258 64%
Irons 221,303 31% 229,112 33% 233,977 28%
Putters, accessories
and other 64,157 9% 78,609 11% 64,692 8%
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Net Sales $714,471 $697,621 100% $842,927 100%
=======================================================================================
</TABLE>
The Company's brands remained number one in the worldwide market for woods,
irons and putters. Sales of the Company's Great Big Bertha(R) Hawk Eye(R)
Titanium Metal Woods, Big Bertha(R) Steelhead(TM) Metal Woods and Big Bertha(R)
X-12(R) Irons were strong in 1999. Great Big Bertha(R) Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons were introduced in September 1999, and Big Bertha(R)
Steelhead Plus(TM) Drivers and Fairway Woods and Big Bertha(R) Steelhead(TM)
X-14(TM) Irons were released in January 2000. The initial acceptance of these
products has also been strong to date. 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.
The Company's principal products are as follows:
Metal Woods
Big Bertha(R) Steelhead Plus(TM) Drivers and Fairway Woods
In January 2000, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and
Fairway Woods, which were based upon and designed to replace the Company's Big
Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods. The new Big
Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and Fairway Woods
incorporate the Company's proprietary Variable Face Thickness Technology. This
technology allows the Company to make the clubface both thinner and more durable
by engineering precise thicknesses at special points across the interior surface
of the face area, which increases the efficiency of the clubhead at impact to
maximize ball speed. The new clubs also contain a new forged crown plate which
lowers the center of gravity in each club. The Company's exclusive Weight Chips
have also been repositioned in the new clubs to calibrate the center of gravity
for maximum performance. The Company offers the Big Bertha(R) Steelhead Plus(TM)
Stainless Steel Drivers in lofts ranging from 6 to 12 degrees. Big Bertha(R)
Steelhead Plus(TM) Stainless Steel Fairway Woods are available in a 2-wood (The
Deuce(R)), Strong 3-wood, 3-wood, Strong 4-wood, 4-wood, 5-wood, 7-wood
(HeavenWood(R)), and 9-wood (Divine Nine(9)), and 11-wood (Ely Would(R)).
Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
In January 1999, the Company introduced and began delivery of significant
quantities of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods were
designed to replace the Company's Great Big Bertha(R) and Biggest Big Bertha(R)
Titanium Drivers and Fairway Woods. Great Big Bertha(R) Hawk Eye(R) Titanium
Drivers and Fairway Woods incorporate a thin titanium crown plate together with
a strong, lightweight titanium body. This design includes a new Tungsten Gravity
Screw that is inserted into the sole of the clubhead and produces a low and deep
center of gravity. The Company offers Great Big Bertha(R) Hawk Eye(R) Titanium
Drivers in lofts ranging from 6 to 12 degrees. Great Big Bertha(R) Hawk Eye(R)
Titanium Fairway Woods are available in a 2-wood (The Deuce(R)), Strong 3-wood,
3-wood, Strong 4-wood, 4-wood, 5-wood, 7-wood (HeavenWood(R)), and 9-wood
(Divine Nine(R)).
Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
In August 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R)Steelhead (TM)Stainless Steel Drivers and Fairway
Woods. Big Bertha(R) Steelhead (TM)Stainless Steel Drivers and Fairway Woods
were designed to replace the Company's Big Bertha(R) Stainless Steel Drivers and
Fairway Woods with the War Bird(R) soleplate. The Big Bertha(R) Steelhead(TM)
Stainless Steel Drivers and Fairway Woods were superseded in January 2000 by the
Company's new Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and
Fairway Woods (discussed above).
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Biggest Big Bertha(R) Titanium Driver
In January 1997, the Company introduced Biggest Big Bertha(R) Titanium
Drivers. Biggest Big Bertha(R) Titanium Drivers were superseded by the Company's
Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods (discussed
above) in January 1999.
Irons
Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons
In January 2000, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons, which
were based upon and designed to replace the Big Bertha(R) X-12(R) Irons. The new
Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons incorporate the
Company's proprietary Variable Face Thickness Technology. This technology allows
the Company to cast the irons with less material in the face area which in turn
allows the Company to move more free weight to other areas of the clubhead. In
the long irons, this extra weight was placed in the sole of the clubhead to
create a lower center of gravity for greater ease in getting the ball airborne.
In the short irons and wedges, the weight was shifted slightly higher to provide
increased control and additional backspin for precise approach shots. These
irons are offered in 1 through 9, and pitch, approach, sand, and lob wedges.
Hawk Eye(R) Tungsten Injected(TM) Titanium Irons
In September 1999, the Company introduced its Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons, which were designed to replace the Company's
previous line of Great Big Bertha(R) Tungsten.Titanium(TM) Irons. The new Hawk
Eye(R) Tungsten Injected(TM) Titanium Irons are injected with the Company's
Tungsten Weight Matrix, which is a mixture of tungsten and other materials that
creates a precisely placed, extremely low center of gravity to help golfers hit
shots with optimum trajectory and maximum forgiveness. These irons are offered
in 1 through 9, and pitch, approach, sand, and lob wedges.
Big Bertha(R) X-12(R) Irons
In January 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) X-12(R) Irons. Big Bertha(R) X-12(R) Irons
incorporate a low center of gravity which helps get the ball airborne more
easily with the proper trajectory and spin. Using the Company's exclusive
proprietary varied 360-degree undercut channel creates a thinner profile, and
together with a new shape and a narrower sole, keeps the center of gravity low.
The unique multi-layer design in the cavity allows for increased forgiveness on
off-center hits. These irons are offered in 1 through 9, and pitch, approach,
sand, and lob wedges. They are also offered in a reduced offset version. With
the exception of the reduced offset version, these irons have been replaced by
the Company's Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons. The
Company expects to continue selling the reduced offset version of the Big
Bertha(R) X-12(R) Irons.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons
In January 1997, the Company introduced Great Big Bertha(R)
Tungsten.Titanium(TM) Irons. In 1999, these irons were superseded by the Hawk
Eye(R) Tungsten Injected(TM) Titanium Irons.
Putters
The Company has various lines of putters, including the Odyssey(R) line of
putters and the Callaway Golf(R) line of putters. Odyssey(R) Putters sold by the
Company incorporate a soft, polymer trapezoidal insert designed to provide
better feel and forgiveness. The Odyssey(R) line of putters include the new
White Hot(Tm) Putters introduced in February 2000, the TriForce(TM) Putters
introduced in 1999, and the Dual Force(R) Blade-Style Putters, which are also
available in the Rossie(TM) Mallet Style Putter. The TriForce(TM) and Dual Force
Putters incorporate a Stronomic(R) Insert(R) that is available in black, green
and blue. The new White Hot(TM) Putters feature a white high-performance insert
made from the proprietary cover material of the Company's new golf balls. The
center of gravity in the TriForce(TM) series of putters has been moved back and
away from the face, which creates better ball roll than similarly-shaped clubs.
This weight distribution is achieved through having the largest Stronomic(R)
insert of any Odyssey(R) putter to date, coupled with a heavy, milled tungsten
flange. The Company also has a Callaway Golf(R) line of steel and graphite
shafted traditional non-insert putters, including the new Carlsbad Series(TM)
putters and Bobby Jones(R) Putters.
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Some of these putters incorporate the S2H2(R) concept, including The Tuttle(R)
and The Tuttle(R) II putters.
Golf Balls
On February 4, 2000, Callaway Golf Ball Company introduced its highly
anticipated new golf balls. The golf balls, named "Rule 35(TM)" come in two
models - Firmfeel(TM) and Softfeel(TM). The Company blended distance, control,
spin and durability into one golf ball providing "Complete Performance (TM)".
The primary difference between the two models is that one is designed for
players who prefer a firmer golf ball and the other is designed for players who
prefer a softer golf ball. The balls are offered in a five-ball sleeve and a
ten-ball pack. The Company expects also to offer the balls in a twenty-pack
later in 2000.
Accessories
In addition to its golf clubs and balls, Callaway Golf offers golf-
related equipment and supplies manufactured by other companies bearing the
Company's trademarks, including golf bags, travel bags, head covers, hats,
umbrellas and other accessories.
Product Design and Development
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. In 1999, 1998 and 1997, the Company expended
on research and development $34,002,000, $36,848,000 and $30,298,000,
respectively. The Company intends to continue to invest substantial amounts in
its research and development activities in 2000 and beyond. In addition to
development of new golf club equipment, these investments will continue to
include, among others, significant expenditures in support of Callaway Golf Ball
Company's efforts to develop and market new golf ball products.
Callaway Golf has the ability to create and modify golf club designs by
using computer aided design software ("CAD"), computer aided manufacturing
software ("CAM") and computer numerical control ("CNC") milling equipment. CAD
software enables designers to develop computer models of new clubhead and shaft
designs. CAM software is then used by engineers to translate the digital output
from CAD computer models so that physical prototypes can be produced. Through
the use of this technology, Callaway Golf has been able to greatly accelerate
the design, development and testing of new golf clubs. In addition, Callaway
Golf Ball Company's sophisticated CAD/CAM design, tooling, ball prototyping and
indoor testing equipment, together with the Company's predictive computer
modeling capability, allows it to develop and test prototype golf balls in a
very short cycle time.
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. While all of the Company's
current golf clubs and golf balls have been found to conform to the Rules of
Golf as applied in the jurisdictions where they are sold, 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. For example, on November 2, 1998, the USGA announced
the adoption of a test protocol to measure the so-called "spring-like effect" in
certain golf clubheads. The USGA has advised the Company that none of the
Company's current clubs sold in the U.S. are barred by this test. The R&A is
considering the adoption of a similar or related test but has not yet done so.
Both the USGA and the R&A are reviewing the current regulations of golf, and one
or both may change those regulations in the future. Future actions by the USGA
or the R&A may adversely impact acceptance of the Company's new products and
therefore could have a material adverse effect on the Company's results of
operations and cash flows.
The Company's new products have tended to incorporate significant
innovations in design and manufacture, which have often resulted in higher
prices for the Company's products relative to other products in the marketplace.
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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 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.
Sales and Marketing
Golf Club Sales in the United States
Approximately 58%, 62%, and 65% of the Company's net sales were derived
from sales for distribution within the United States in 1999, 1998 and 1997,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1999, 1998, or 1997. The Company
distributes its products in Hawaii through an exclusive distributor. The Company
previously reported that it believed that the dollar volume of the premium golf
club market had been declining in certain major markets, including the United
States. Although the Company believes that market conditions may have
stabilized, there is no assurance that the overall dollar volume of the premium
golf club market in the United States will grow significantly, or that it will
not decline, in the near future. During 1999, the Company's U. S. revenues
decreased 5% compared to 1998. The Company believes that this decrease in United
States revenue was due in part to softness in the United States market, lower
revenue per club from sales of golf equipment at low or close-out prices, and
declines in iron and putter sales due to the maturity of those product lines.
The Company, through its subsidiary Callaway Golf Sales Company, currently
employs full-time regional field representatives, in-house telephone
salespersons and customer service representatives in connection with golf club
and accessory sales. Each geographic region is covered by both a field
representative and a telephone salesperson who work together to initiate and
maintain relationships with customers through frequent telephone calls and in-
person visits. The Company believes that this tandem approach of utilizing
field representatives and telephone salespersons provides the Company a
competitive advantage over other golf club manufacturers that distribute their
golf clubs solely through independent sales representatives rather than
employees. Notwithstanding the foregoing, Callaway Golf recognizes that other
companies have marketing programs which may be equally or more effective than
its own strategy.
Golf Club Sales Outside of the United States
Approximately 42%, 38% and 35% of the Company's net sales were derived from
sales for distribution outside of the United States in 1999, 1998, and 1997,
respectively. In 1997, the majority of the Company's international sales were
made through distributors specializing in the sale and promotion of golf clubs
in specific countries or regions around the world. In 1999 and 1998, the
majority of the Company's international sales were made through its foreign
subsidiaries. During 1999, the Company's international revenues increased 16%
compared to 1998. The Company believes that this increase in international
revenue is largely attributable to a significant increase in revenue from sales
in Korea as a result of the economic recovery of the Korean market and the
introduction of higher margin products in Korea in 1999. The Company does not
expect that revenue in Korea will continue to increase at a rate comparable to
1999. The Company further believes that some portion of sales to international
customers recorded
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in 1999 as direct international sales may have formerly been made to the same
international customers indirectly through the United States distribution
channel. See below "Gray Market."
The Company's management believes that controlling the distribution of its
products in certain major markets in the world has been and will be an element
in the future growth and success of the Company. The Company has been actively
pursuing a reorganization of its international operations, including the
acquisition of distribution rights in certain key countries in Europe, Asia and
North America. These efforts have resulted and will continue to result in
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.
As a result of these acquisitions, the Company sells its products in Great
Britain, Belgium, Finland, Denmark, Sweden, Norway, Ireland, France, Germany,
Austria, the Netherlands, and Switzerland through its subsidiary Callaway Golf
Europe Ltd. The Company sells its products in Korea through its subsidiary
Callaway Golf Korea Ltd. The Company sells its products in Canada through its
subsidiary, Callaway Golf Canada Ltd.
In addition to sales through its subsidiaries, the Company also currently
has distribution arrangements covering sales of the Company's products in over
40 foreign countries, including Singapore, Spain, Italy, Hong Kong, Australia,
Argentina and South Africa. Prices of golf clubs for sales outside of the United
States receive an export pricing discount to compensate international
distributors for selling, advertising and distribution costs. A change in the
Company's relationship with significant distributors could negatively impact the
volume of the Company's international sales.
The Company appointed Sumitomo Rubber Industries, Ltd. ("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 the Callaway Golf business to
the Company. As a result of the transition agreement, the Company recorded a net
charge of $8.6 million in the fourth quarter of 1999 for buying certain current
inventory, payments for non-current inventory and other transition expenses,
including foreign currency transaction losses.
Effective January 1, 2000, the Company began distributing Callaway Golf(R)
brand products in Japan through its wholly-owned subsidiary, Callaway Golf K.
K., which also distributes Odyssey(R) products and will also distribute Callaway
Golf(TM) balls. In addition to the fourth quarter 1999 charges noted above,
there will be significant costs and capital expenditures invested in Callaway
Golf K. K. before there will be sales sufficient to support such costs.
Furthermore, 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. 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 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. There also is no assurance that the Company will be able to transcend
the cultural 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. It
is possible that these circumstances could have a material adverse effect on the
Company's operations and financial performance. There also will be a delay in
the recording of revenues for sales in Japan as compared to previous years
because revenue will now be recorded upon sale to the retailers and not upon
sale to a distributor.
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.
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. During 2000, the Company intends to
upgrade its business system. The upgraded version of this business system should
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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, 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.
Golf Ball Sales
In 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company had previously licensed the manufacture and
distribution of a golf ball in Japan and Korea. The Company also had distributed
a golf ball under the trademark "Bobby Jones(R)." These previous golf ball
ventures were introduced primarily as promotional efforts and were not
commercially successful.
In February 2000, Callaway Golf Ball Company released 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 for that
purpose. To date, the Company's investment in its golf ball business has
exceeded $170 million. The development of the 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. The success of the Company's new golf ball business could
be adversely affected by various risks, including, among others, delays or
difficulties in manufacturing or distribution and unanticipated costs. 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.
Furthermore, although the Company expects production of the golf balls to
increase as 2000 progresses, there is no assurance 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.
Callaway Golf Ball Company sells its golf balls in the United States
through its own dedicated sales team. Its sales representatives are employees
and consist of retail sales representatives and corporate sales representatives.
The retail sales representatives service both on-course and off-course customers
in their assigned geographic territories and are further supported by in-house
telephone sales representatives. Both field and in-house telephone corporate
sales representatives call on corporate customers who want their corporate logo
placed on the Company's golf balls. Unlike many of its competitors, Callaway
Golf Ball Company does not use third parties to provide the corporate logo golf
balls. Callaway Golf Ball Company imprints the logos on its golf balls in the
same facility in which it manufactures the golf balls, thereby retaining control
over the quality of the process and final product. Callaway Golf Ball Company
also pays an agency fee to certain on- and off-course professionals and
retailers with whom it has a relationship for corporate sales that originate
through such professionals and retailers. Its international sales will be
effected through the Company's international subsidiaries and distributors.
Gross Margin
The Company's gross margin as a percentage of net sales increased to 47% in
1999 from 42% in 1998. This increase primarily resulted from lower obsolescence
charges in 1999 (vs. a $30 million excess inventory charge recorded in the
fourth quarter of 1998), higher metal wood sales (which carry higher margins) as
a percentage of total net sales, as compared to 1998, and from reductions in
manufacturing labor and overhead costs realized through the Company's 1998
restructuring, along with reductions in certain component costs. Gross margin as
a percentage of net sales would have improved to 49% but for close-out sales of
Great Big Bertha(R) Tungsten Titanium(TM) Irons, Great Big Bertha(R) and Biggest
Big Bertha(R) Titanium Metal Woods, and Big Bertha(R) War Bird(R) Metal Woods,
which had much lower margins. However, consumer acceptance of current and new
product introductions, the sale and disposal of non-current products at reduced
sales prices and continuing pricing pressure from competitive market conditions
may have an adverse effect on the Company's future sales and gross margin.
Furthermore, the Company expects that in 2000 the Company's sales of irons as a
percentage of total net sales will increase. This would negatively impact the
Company's gross margin as a percentage of net sales because irons generally sell
at lower margins than woods.
The Company's margins also could be affected by its golf ball business.
During 2000, the Company expects that its margins in the golf ball business will
be less than the levels it expects to achieve when the Company can attain a
level of operational and sales efficiency that allows it to benefit from certain
economies of scale. There is no
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assurance, however, that the Company will achieve the economies of scale
necessary to maintain or improve its current overall sales margins.
Method of Distribution
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of golf club and golf ball 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.
Gray Market
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 United States and abroad, it has not
stopped such commerce.
Credit Risk
The Company primarily sells its products to golf equipment retailers, both
in the United States and abroad, and to foreign distributors. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from these customers. Historically, the
Company's bad debt expense has been low. However, the recent downturn in the
retail golf equipment market, primarily in the United States, has resulted in
delinquent or uncollectible accounts for some of the Company's significant
customers. As a result, during 1999 the Company wrote off approximately $5.3
million of past due trade accounts receivable against the Company's reserve for
uncollectible accounts receivable. Management does not foresee any significant
improvement in the U.S. retail golf equipment market during 2000. 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 or cash flows.
Advertising and Promotion
Within the United States, the Company has focused its advertising efforts
mainly on a combination of television commercials and printed advertisements in
national magazines, such as Golf Digest, Golf Magazine, Golfweek, Golf World and
Sports Illustrated's Golf Plus, and in trade publications, such as Golf Shop
Operations. Advertising of the Company's golf clubs outside of the United States
is typically handled by the Company's wholly-owned subsidiaries as well as
distributors and resellers of the products in a particular country.
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
and the PGA European Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's products
despite contractual commitments. If certain of 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. In addition, the Company has created cash pools
("Pools") that reward such usage. However, in 1999, 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.
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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.
For the last several years, the Company has experienced an exceptional level
of driver penetration on the world's five major professional tours, and the
Company has heavily advertised that fact. While it is not clear to what extent
professional usage contributes to retail sales, it is possible that the recent
decline in the level of professional usage of the Company's products could have
a material adverse effect on the Company's business.
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.
To support the promotion of its products at the retail level, the Company
offers various promotional programs to its customers. Golf clubs may be
purchased at a discount by golf shop professionals, for personal demonstration,
test, loan and rental use.
The Company's advertising, promotional and endorsement related expenses,
including compensation to professional golfers, were approximately $55.4
million, $79.1 million and $62.4 million in 1999, 1998 and 1997, respectively.
Manufacturing and Sources and Availability of Materials
The manufacturing of the Company's golf clubs and golf balls involves a
number of specialized processes required by the unique design of the products.
The Company's metal woods and irons are produced by the Company's
manufacturing personnel at its Carlsbad, California facilities using clubheads,
shafts and grips supplied by independent vendors. The Company works with a few
select casting houses to produce its clubheads. The clubheads used in the
production of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
are manufactured to Callaway Golf's specifications by Cast Alloys, Inc.
("Alloys"), Coastcast Corporation ("Coastcast"), and Fu Sheng. Coastcast and
Alloys cast Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and Fairway
Woods clubheads. Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons are
provided by Hitchiner Manufacturing Co. and Coastcast, and Big Bertha(R) X-12(R)
reduced offset iron clubheads are provided by Coastcast. Hawkeye(R) Tungsten
Injected(TM) Titanium Irons are provided by Coastcast. The Company's principal
supplier of clubheads for the Company's putters are provided by Hitchiner
Manufacturing Co. The Company works closely with its casting houses, which
enables the Company to monitor the quality and reliability of clubhead
production. All of these casting houses are currently manufacturing, or are
entitled to manufacture, clubheads for competitors of the Company. The Company
also works closely with Aldila, True Temper, HST, Graphite Design, Inc., FM
Precision, Suntech-Sunwoo Co, Ltd., its principal suppliers of shafts, to
develop specialized shafts suited to the S2H2(R) design and the other unique
features of the Company's products. The Company's proprietary grip designs are
provided by Golf Pride Lamkin and Winn Grips.
The Company is dependent on a limited number of suppliers for its club
heads and shafts. In addition, some of the Company's products require
specifically developed manufacturing techniques and processes which make it
difficult to identify and utilize alternative suppliers quickly. The Company
believes that suitable club heads 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's golf balls are also produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using core and cover materials
supplied by independent vendors. 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 material, are customized for the
Company. The Company has developed supply relationships with
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several resin and chemical producers worldwide. It works closely with such
suppliers to maintain tight tolerances in the manufacturing processes and also
to develop next generation formulations for golf ball research and development.
Any delay or interruption in the supply chain 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's size has made it a large consumer of certain materials,
including titanium alloys, carbon fiber and custom blend urethanes. Callaway
Golf does not make these materials itself, and must rely on its ability to
obtain adequate supplies in the world marketplace in competition with other
users of such materials. While the Company has been successful in obtaining its
requirements for such materials thus far, there can be no assurance that it
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.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
Handling of Materials
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. As a standard procedure, a comprehensive audit of the treatment,
storage, and disposal facility with which the Company contracts for the disposal
of hazardous waste is performed annually by the Company. To date, the Company
has not experienced any material environmental compliance problems, although
there can be no assurance that such problems will not arise in the future.
Product Warranties
The Company supports all of its golf clubs with a limited two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. In addition, the
Company's Biggest Big Bertha(R) Drivers, because of their large club head size
and extra long, lightweight graphite shafts, have experienced shaft breakage at
a rate higher than generally experienced with the Company's other metal woods,
even though these shafts were among the most expensive to manufacture in the
industry. This product was discontinued in 1999. While any breakage or warranty
problems are deemed significant to the Company, the incidence of clubs returned
as a result of cracked clubheads, broken graphite shafts, loose medallions and
other product problems to date has not been material in relation to the volume
of Callaway Golf(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.
Intellectual Property
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents, trademark registrations and copyrights, the maintenance of trade
secrets, the development of trade dress, and, when necessary and appropriate,
litigation against those who are, in the Company's opinion, unfairly competing.
In the United States, the Company has applied for or been granted patents for
certain features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway Golf(R), Big Bertha(R), Great Big Bertha(R), Hawk
Eye(R), S2H2(R), Odyssey(R), Stronomic(R) and several other product names. There
is no assurance that during the life of a patent or a trademark, prior to a
court of competent jurisdiction validating them, any of these patents or
trademarks are enforceable, although the Company believes them to be
enforceable.
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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 golf club products. The Company
evaluates any such claims and, where appropriate, has obtained or sought to
obtain licenses or other business arrangements. To date, there have been no
interruptions in the Company's business as a result of any claims of
infringement. No assurance can be given, however, that the Company will not be
adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
Various patents have been issued to the Company's competitors in the golf
ball industry. As Callaway Golf Ball Company 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 Company's new
golf ball products infringe any patent or other rights of competitors. If the
Company's 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 the Company could incur substantial costs to redesign its
golf ball products 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.
Licensing
Through a licensing arrangement with Jonesheirs, Inc., Callaway Golf
obtained the exclusive, worldwide rights to the use of the Bobby Jones(R) name
for golf clubs and golf-related accessories through 2010. The Company receives a
royalty from the Hickey-Freeman Company on sales of Bobby Jones(R) Sportswear
and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel in the
U.S. at its own expense under the "Callaway Golf Apparel by Nordstrom" label.
The licensing agreement runs through 2004 with automatic one-year extensions
unless terminated by either party. The line includes men's and women's golf
apparel, golf footwear and certain other products and is sold at Nordstrom
stores throughout the United States.
In 1997, Callaway Golf and Bausch & Lomb Incorporated signed a multi-year
agreement to jointly develop and globally market an exclusive line of premium
sunglasses specifically for golf enthusiasts. The sunglasses and sunglass
cases, co-branded with the Ray-Ban(R), Callaway Golf(R) and Callaway(R) marks,
were introduced in 1999 and are available through golf pro shops and other
retailers of premium golf equipment, better sporting goods and better department
stores, sunglass specialty shops and optical channels. Later in 1999, the
Luxottica Group purchased the Bausch & Lomb sunglass business. The Company is
currently discussing with Luxottica what effect the acquisition will have on the
relationship.
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 for both its golf club and golf ball businesses. 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.
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Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names, as well as new companies with popular products. With
respect to metal woods, the Company's major domestic competitors are Taylor
Made, Titleist, Cobra and Ping. In 1998, Orlimar and Adams emerged as new
competitors. With respect to irons, the Company's major domestic competitors
are Titleist, Cobra, Taylor Made and Ping. For putters, the Company's major
domestic competitors are Ping and Titleist. New product introductions and/or
price reductions by competitors continue to generate increased market
competition. However, the Company believes that it has gained unit and dollar
market share for woods in the United States during 1999 as compared to 1998.
While the Company believes that its products and its marketing efforts continue
to be competitive, there can be no assurance that successful marketing
activities by competitors will not negatively impact the Company's future sales.
A 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 Titleist, Spalding,
Sumitomo Rubber Industries, Bridgestone and others. These competitors have
established market share in the golf ball business, with one of its competitors
having an estimated market share in excess of 50% of the premium golf ball
business. The Company will need to penetrate this market share for its golf
ball business to be successful. There can be no assurance that the Company's
golf balls will obtain the market acceptance necessary to penetrate this
established market.
Employees
As of December 31, 1999, the Company and its subsidiaries had 2,526 full-
time employees, including 399 employed in sales and marketing, 191 employed in
research and development and product engineering and 1,002 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
Item 2. Properties.
The Company and its subsidiaries conduct operations in both owned and
leased properties, located primarily near the Company's headquarters in
Carlsbad, California. The eleven buildings utilized in the Company's Carlsbad
operations include corporate offices, manufacturing, research and development,
warehousing and distribution facilities, and comprise approximately 778,000
square feet of space. Eight of these properties, representing approximately
605,000 square feet of space are owned by the Company; an additional three
properties, representing approximately 173,000 square feet of space, are leased.
In addition, the Company and its subsidiaries conduct certain international
operations outside of the United States, located in the United Kingdom, Canada,
Japan and Korea, in leased facilities comprising approximately 195,000 square
feet. The Company believes that its facilities currently are adequate to meet
its requirements.
Item 3. 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
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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 4. Submission of Matters to a Vote of Securities Holders.
None.
Executive Officers of the Registrant
Biographical information concerning certain of the Company's officers is
set forth below.
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Ely Callaway.................. 80 Founder, Chairman and Chief Executive Officer
Charles J. Yash............... 51 President and Acting Principal Financial Officer
Ronald A. Drapeau............. 53 Senior Executive Vice President, Manufacturing
Richard C. Helmstetter........ 58 Senior Executive Vice President, Chief of New Golf Club Products
Steven C. McCracken........... 49 Executive Vice President, Licensing, Chief Legal Officer and Secretary
Michael W. McCormick.......... 37 Executive Vice President, Global Sales
</TABLE>
Ely Callaway, Founder, has served his current term as Chief Executive
Officer since October 1998, and also has served as Chairman of the Board of the
Company since the Company's formation in 1982. Mr. Callaway also currently
serves on the Finance Committee and as Chairman of the Stock Option Committee
(Non-Employee Plans). He served as President of the Company from October 1998
until August 1999, as Chief Executive Officer from 1982 to May 1996, and Chief
of Advertising, Press and Public Relations from April 1997 to October 1998.
From 1974 to 1981, Mr. Callaway founded and operated Callaway Vineyard and
Winery in Temecula, California, until it was sold. From 1946 to 1973, Mr.
Callaway worked in the textile industry, where he served as a Divisional
President of several major divisions of Burlington Industries, Inc., and in 1968
was elected Corporate President and Director of Burlington, which at the time
was the world's largest textile company. Prior to 1945, Mr. Callaway served a
five-year tour of duty in the U.S. Army Quartermaster Corps. Mr. Callaway is a
1940 graduate of Emory University.
Charles J. Yash has served as a Director of the Company since July 1996 and
President of the Company since August 1999. Mr. Yash was Senior Executive Vice
President of the Company from February 1999 to August 1999 and Executive Vice
President from February 1998 to February 1999. He has also served as President
and Chief Executive Officer of Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, since June 1996. From 1992 to June 1996, Mr. Yash
was President and Chief Executive Officer and a Director of Taylor Made Golf
Company. From 1979 to 1992, Mr. Yash was employed in various marketing
positions with the golf products division of Spalding Sports Worldwide,
including Corporate Vice President and General Manager-Golf Products, from 1988
to 1992. From 1970 to 1975, Mr. Yash served in the United States Navy in
various positions. Mr. Yash completed the Advanced Executive Program at the
University of Massachusetts in 1982, received his M.B.A. in 1977 from Harvard
Business School and graduated with a Bachelor of Science degree from the U.S.
Naval Academy in 1970.
15
<PAGE>
Ronald A. Drapeau has served as Senior Executive Vice President,
Manufacturing, since February 1999 and as President and Chief Executive Officer
of Odyssey Golf, Inc., a former wholly-owned subsidiary of the Company, from
August 1997 until its dissolution in December 1999. Mr. Drapeau served as
Executive Vice President of the Company from August 1997 to February 1999, and
served as a consultant to the Company from November 1996 to August 1997. From
April 1993 to September 1996, Mr. Drapeau served as Chief Executive Officer of
Lynx Golf, Inc., a subsidiary of Zurn Industries, Inc., and served as Senior
Vice President and Chief Financial Officer of Zurn Industries, Inc. from 1992 to
1993. He is a 1969 graduate of Bentley College.
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Golf Club Products since January 1998 and as Senior
Executive Vice President, Chief of New Products from April 1993 to January 1998.
Mr. Helmstetter served as President from 1990 to 1993 and as Executive Vice
President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as
President of Adam Ltd., a pool cue manufacturing and merchandising company which
he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also
consulted extensively for several Japanese, European and American companies,
including Bridgestone Corporation's strategic planning group. Mr. Helmstetter is
a 1966 graduate of the University of Wisconsin.
Steven C. McCracken has served as Executive Vice President, Licensing and
Chief Legal Officer since April 1997 and as Secretary since April 1994. He has
served as an Executive Vice President since April 1996 and served as General
Counsel from April 1994 to April 1997. He served as Vice President from April
1994 to April 1996. Prior to joining the Company, Mr. McCracken was a partner
at Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of
law for over 18 years. During part of that period, he provided legal services
to the Company. Mr. McCracken received a B.A., magna cum laude, from the
University of California at Irvine in 1972 and a J.D. from the University of
Virginia in 1975.
Michael W. McCormick has served as Executive Vice President, Global Sales
since January 2000. Prior to joining the Company, Mr. McCormick was with Nike,
Inc. since 1992, serving as Eastern Regional Sales Manager, Director of Golf
Sales, Southern Regional Sales Manager, and Director of National Sales. He was
responsible for more than $2 billion of Nike footwear, apparel and equipment
revenues. Prior to Nike, Mr. McCormick was Vice President, Operations for Las
Vegas Golf and Tennis from 1989 to 1992.
Information with respect to the Company's employment agreements with
Messrs. Callaway, Yash and Helmstetter is contained on pages 15 and 16 of the
Company's definitive Proxy Statement under the caption "Compensation of
Executive Officers - Employment Agreements and Termination of Employment
Agreements" as filed with the Securities and Exchange Commission on March 29,
2000 pursuant to Regulation 14A, which information is incorporated herein by
reference. In addition, the Company currently has employment agreements with
Messrs. Drapeau, McCracken and McCormick for terms expiring on December 31,
2000, December 31, 2000 and December 31, 2002 respectively.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information in response to Item 5 is contained on page 48 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 6. Selected Financial Data.
Information in response to Item 6 is contained on page 16 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Information in response to Item 7 is contained on pages 17 through 27 of
the Company's 1999 Annual Report to Shareholders, which information is
incorporated herein by reference and is included as part of Exhibit 13.1 to this
Form 10-K.
16
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information in response to Item 7A is contained on page 27 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Information in response to Item 8 is contained on pages 28 through 48 of
the Company's 1999 Annual Report to Shareholders, which information is
incorporated herein by reference and is included as part of Exhibit 13.1 to this
Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information concerning the Company's executive officers is included
under the caption "Executive Officers of the Registrant" following Part I, Item
4. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and greater than 10% shareholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of Company securities with the Securities and Exchange Commission (the
"Commission") and the New York Stock Exchange. Based solely on its review of
copies of such forms and such written representations regarding compliance with
such filing requirements as were received from its executive officers, directors
and greater than 10% shareholders, the Company believes that all such Section
16(a) reports were filed on a timely basis in 1999.
Other information required by Item 10 has been included in the Company's
definitive Proxy Statement under the caption "Board of Directors" as filed with
the Commission on March 29, 2000 pursuant to Regulation 14A, which information
is incorporated herein by reference.
Item 11. Executive Compensation.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as exhibits to this Report.
Information required by Item 11 has been included in the Company's definitive
Proxy Statement under the captions "Compensation of Executive Officers,"
"Executive Compensation Report of the Compensation and Management Succession
Committee and the Stock Option Committee (Employee Plans) of the Board of
Directors," "Performance Graph" and "Board of Directors," as filed with the
Commission on March 29, 2000 pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 has been included in the Company's
definitive Proxy Statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on March 29, 2000 pursuant
to Regulation 14A, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 has been included in the Company's
definitive Proxy Statement under the captions "Certain Transactions," and
"Compensation of Executive Officers - Compensation Committee Interlocks and
Insider Participation" as filed with the Commission on March 29, 2000 pursuant
to Regulation 14A, which information is incorporated herein by reference.
17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of Callaway Golf Company and its subsidiaries included in
Part II, Item 8, are incorporated by reference to pages 28 through
47 of the 1999 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1999 and 1998
Consolidated Statement of Operations for the three years ended
December 31, 1999
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial Statement Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto
3. Exhibits.
A copy of any of the following exhibits will be furnished to any
beneficial owner of the Company's Common Stock, or any person from
whom the Company solicits a proxy, upon written request and payment
of the Company's reasonable expenses in furnishing any such exhibit.
All such requests should be directed to the Company's Director of
Investor Relations at Callaway Golf Company, 2285 Rutherford Road,
Carlsbad, CA 92008.
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 ("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).
4.1 Dividend Reinvestment and Stock Purchase Plan, incorporated
herein by this reference to the Prospectus in the Company's
Registration Statement on Form S-3, as filed with the
Commission on March 29, 1994 (file no. 33-77024).
4.2 Rights Agreement by and between the Company and Chemical
Mellon Shareholder Services as Rights Agent dated as of June
21, 1995, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1995, as filed with
the Commission on August 12, 1995 (file no. 1-10962).
4.3 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior Participating
Preferred Stock, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for
18
<PAGE>
the quarter ended June 30, 1995, as filed with the Commission
on August 12, 1995 (file no. 1-10962).
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between the
Company and Ely Callaway entered into as of January 1, 1997,
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, as filed with the Commission
on August 14, 1997 (file no. 1-10962).
10.2 First Amendment to Chairman and Founder Employment Agreement
effective December 31, 1999 between the Company and Ely
Callaway. +
10.3 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Charles J. Yash. +
10.4 Stock Option Agreement by and between the Company and Charles
J. Yash dated as of May 10, 1996, incorporated herein by this
reference to the corresponding exhibit in the Company's
Registration Statement on Form S-8, as filed with the
Commission on June 11, 1996 (file no. 333-5721).
10.5 Executive Officer Employment Agreement by and between the
Company and Richard Helmstetter entered into as of January 1,
1998, incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the
Commission on March 31, 1998 (file no. 1-10962).
10.6 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Ronald A. Drapeau.+
10.7 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Steven C.
McCracken. +
10.8 Executive Officer Employment Agreement, entered into as of
December 21, 1999, between the Company and Mick McCormick. +
10.9 Employment Agreement, entered into as of January 1, 2000,
between the Company and Bruce Parker. +
10.10 Resignation Agreement and General Release effective November
23, 1999 between the Company and Frederick R. Port. +
10.11 Release between Frederick R. Port and the Company. +
10.12 Agreement between the Company and Donald H. Dye dated as of
October 15, 1998, incorporated herein by this reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Commission on March 31,
1998 (file no. 1-10962).
10.13 Consulting Agreement between the Company and Donald H. Dye
dated as of October 15, 1998, incorporated herein by this
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Commission on
March 31, 1999 (file no. 1-10962).
10.14 Form of Tax Indemnification Agreement, incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
10.15 Amendment No. 1 to Form of Tax Indemnification Agreement,
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996, as filed with the
Commission on November 13, 1996 (file no. 1-10962).
10.16 Executive Deferred Compensation Plan (as amended and
restated, effective January 1, 1998), incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, as filed with the Commission on May 17, 1998 (file no.
1-10962).
10.17 Amendment to Executive Deferred Compensation Plan dated as of
January 1, 1999, incorporated herein by this reference to the
Company's Quarterly report on Form 10-Q for the quarter ended
March 31, 1999, as filed with the Commission on May 17, 1999
(file no. 1-10962).
10.18 Callaway Golf Company 1998 Executive Non-Discretionary Bonus
Plan, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, as filed with
the Commission on May 15, 1997 (file no. 1-10962).
10.19 1991 Stock Incentive Plan (as amended and restated April
1994), incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, as filed with the
Commission on March 31, 1995 (file no. 1-10962).
19
<PAGE>
10.20 Amended and Restated Stock Option Plan effective April 2, 199
1, incorporated herein by this reference to the corresponding
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, as filed with the Commission on
April 1, 1996 (file no. 1-10962).
10.21 1996 Stock Option Plan (as amended and restated through April
23, 1998), incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1998, as filed with
the Commission on August 14, 1998 (file no. 1-10962).
10.22 Callaway Golf Company 1998 Stock Incentive Plan effective
February 18, 1998, incorporated herein by this reference to
the corresponding exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, as filed
with the Commission on August 14, 1998 (file no. 1-10962).
10.23 Callaway Golf Company Non-Employee Directors Stock Option
Plan (as amended and restated through August 17, 1999),
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, as filed with the
Commission on November 15, 1999 (file no. 1-10962).
10.24 Indemnification Agreement by and between Callaway Golf Company
and William C. Baker dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.25 Indemnification Agreement by and between Callaway Golf Company
and Vernon E. Jordan, Jr. dated as of July 1, 1999,
incorporated herein by this reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, as filed with the Commission on August 16, 1999 (file no.
1-10962).
10.26 Indemnification Agreement by and between Callaway Golf Company
and Yotaro Kobayashi dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.27 Indemnification Agreement by and between Callaway Golf Company
and Aulana L. Peters dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.28 Indemnification Agreement by and between Callaway Golf Company
and Richard L. Rosenfield dated as of July 1, 1999,
incorporated herein by this reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, as filed with the Commission on August 16, 1999 (file no.
1-10962).
20
<PAGE>
10.29 Indemnification Agreement by and between Callaway Golf Company
and William A. Schreyer dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
Other Contracts
10.30 Credit Agreement dated as of December 30, 1998, among Callaway
Golf Company, the other Credit Parties signatory thereto, the
Lenders signatory thereto from time to time and General
Electric Capital Corporation , as Agent for the Lenders,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
January 28, 1999, as filed with the Commission on January 28,
1999 (file no. 1-10962).
10.31 Amended and Restated Credit Agreement dated as of February 10,
1999, among Callaway Golf Company, as Borrower, the other
credit parties signatory thereto, as Credit Parties, the
Lenders signatory thereto from time to time and General
Electric Capital Corporation , as Agent and Lender,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
February 25, 1999, as filed with the Commission on February
25, 1999 (file no. 1-10962).
10.32 Receivables Transfer Agreement dated as of February 10, 1999,
by and among Callaway Golf Sales Company and Odyssey Golf,
Inc, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form
8-K dated February 25, 1999, as filed with the Commission on
February 25, 1999 (file no. 1-10962).
10.33 Receivables Transfer Agreement dated as of February 10, 1999,
by and among Callaway Golf Company, as Parent Guarantor,
Callaway Golf Sales Company, as the CGS Originator and as
Servicer, and Golf Funding Corporation, incorporated herein by
this reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated February 25, 1999, as filed
with the Commission on February 25, 1999 (file no. 1-10962).
10.34 Receivables Purchase and Servicing Agreement dated as of
February 10, 1999, by and among Golf Funding Corporation, as
Seller, Redwood Receivables Corporation, as Purchaser,
Callaway Golf Sales Company, as Servicer, and General Electric
Capital Corporation, as Operating Agent and Collateral Agent,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
February 25, 1999, as filed with the Commission on February
25, 1999 (file no. 1-10962).
10.35 Trust Agreement between Callaway Golf Company and Sanwa Bank
California, as Trustee, for the benefit of participating
employees, dated July 14, 1995, incorporated herein by this
reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, as filed with the Commission on November 14, 1995
(file no. 1-10962).
10.36 Loan Forgiveness Agreement effective as of March 8, 1999, by
and among Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
10.37 Membership Interest Purchase Agreement effective as of March
8, 1999, by and among Callaway Golf Company and Callaway
Editions, Inc., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
21
<PAGE>
10.38 Loan Termination Agreement effective as of March 10, 1999, by
and among Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
10.39 Trademark License Agreement effective as of March 9, 1999, by
and between Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
13.1 Portions of the Company's 1999 Annual Report to Shareholders
(with the exception of the information incorporated by
reference specifically in this Report on Form 10-K, the 1999
Annual Report to Shareholders is not deemed to be filed as a
part of this Report on Form 10-K).
21.1 List of Subsidiaries. +
23.1 Consent of Independent Accountants. +
24.1 Powers of Attorney. +
27.1 Financial Data Schedule for the Year Ended December 31, 1999.+
+ Included in this Report
(b) Reports on Form 8-K:
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: March 30, 2000 By: /s/ Ely Callaway
----------------------------------
Ely Callaway
Founder, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons in the capacities and as of the date
indicated.
<TABLE>
<CAPTION>
Signature Title Dated as of
--------- ----- -----------
<S> <C> <C>
Principal Executive Officer:
/s/ Ely Callaway Founder, Chairman and March 30, 2000
- ---------------------------- Chief Executive Officer and
Ely Callaway Director
Acting Principal Financial Officer:
/s/ Charles J. Yash President and Director March 30, 2000
- ----------------------------
Charles J. Yash
Principal Accounting Officer:
/s/ Kenneth E. Wolf Senior Vice President, March 30, 2000
- ---------------------------- Finance and Controller
Kenneth E. Wolf
Directors:
*
- ---------------------------- Director March 30, 2000
William C. Baker
*
- ---------------------------- Director March 30, 2000
Vernon E. Jordan, Jr.
*
- ---------------------------- Director March 30, 2000
Yotaro Kobayashi
*
- ---------------------------- Director March 30, 2000
Aulana L. Peters
*
- ---------------------------- Director March 30, 2000
Richard Rosenfield
*
- ---------------------------- Director March 30, 2000
William A. Schreyer
</TABLE>
* By: /s/ Charles J. Yash
----------------------
Charles J. Yash,
Attorney-in-fact
23
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Shareholders
of Callaway Golf Company:
Our audits of the consolidated financial statements referred to in our report
dated January 26, 2000, appearing in the 1999 Annual Report to Shareholders of
Callaway Golf Company (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Diego, California
January 26, 2000
24
<PAGE>
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For The Three Year Period Ended December 31, 1999
<TABLE>
<CAPTION>
Allowance Allowance Allowance Valuation Allowance
for Doubtful for Obsolete for Warranty For Deferred
Date Accounts Inventory Costs Tax Assets
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 6,337 $ 5,284 $ 27,303
---------------------------------------------------------------------
Provision 1,354 743 13,726
Write-off, net (645) (353) (12,970)
---------------------------------------------------------------------
Balance, December 31, 1997 7,046 5,674 28,059
---------------------------------------------------------------------
Provision 4,171 33,214 24,681 $1,759
Write-off, net (1,278) (2,040) (16,925)
-----------------------------------------------------------------------
Balance, December 31, 1998 9,939 36,848 35,815 1,759
-----------------------------------------------------------------------
Provision 655 2,649 18,023 2,919
Write-off, net (5,303) (24,503) (17,733) (488)
-----------------------------------------------------------------------
Balance, December 31, 1999 $ 5,291 $ 14,994 $ 36,105 $4,190
=======================================================================
</TABLE>
25
<PAGE>
EXHIBIT INDEX
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 ("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).
4.1 Dividend Reinvestment and Stock Purchase Plan, incorporated herein
by this reference to the Prospectus in the Company's Registration
Statement on Form S-3, as filed with the Commission on March 29, 1994
(file no. 33-77024).
4.2 Rights Agreement by and between the Company and Chemical Mellon
Shareholder Services as Rights Agent dated as of June 21, 1995,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
4.3 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series A Junior Participating Preferred Stock,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between the Company
and Ely Callaway entered into as of January 1, 1997, incorporated
herein by this reference to the corresponding exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, as filed with the Commission on August 14, 1997 (file no.
1-10962).
10.2 First Amendment to Chairman and Founder Employment Agreement
effective December 31, 1999 between the Company and Ely Callaway. +
10.3 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Charles J. Yash. +
10.4 Stock Option Agreement by and between the Company and Charles J. Yash
dated as of May 10, 1996, incorporated herein by this reference to
the corresponding exhibit in the Company's Registration Statement on
Form S-8, as filed with the Commission on June 11, 1996 (file no.
333-5721).
10.5 Executive Officer Employment Agreement by and between the Company and
Richard Helmstetter entered into as of January 1, 1998, incorporated
herein by this reference to the corresponding exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, as filed with the Commission on March 31, 1998 (file no. 1-
10962).
26
<PAGE>
10.6 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Ronald A. Drapeau .+
10.7 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Steven C. McCracken. +
10.8 Executive Officer Employment Agreement, entered into as of December
21, 1999, between the Company and Mick McCormick. +
10.9 Employment Agreement, entered into as of January 1, 2000, between the
Company and Bruce Parker. +
10.10 Resignation Agreement and General Release effective November 23,
1999 between the Company and Frederick R. Port. +
10.11 Release between Frederick R. Port and the Company. +
10.12 Agreement between the Company and Donald H. Dye dated as of October
15, 1998, incorporated herein by this reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, as
filed with the Commission on March 31, 1998 (file no. 1-10962).
10.13 Consulting Agreement between the Company and Donald H. Dye dated as
of October 15, 1998, incorporated herein by this reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.14 Form of Tax Indemnification Agreement, incorporated herein by this
reference to the corresponding exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as filed
with the Commission on August 12, 1995 (file no. 1-10962).
10.15 Amendment No. 1 to Form of Tax Indemnification Agreement,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1996, as filed with the Commission on November 13, 1996
(file no. 1-10962).
10.16 Executive Deferred Compensation Plan (as amended and restated,
effective January 1, 1998), incorporated herein by this reference to
the corresponding exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, as filed with the
Commission on May 17, 1998 (file no. 1-10962).
10.17 Amendment to Executive Deferred Compensation Plan dated as of January
1, 1999, incorporated herein by this reference to the Company's
Quarterly report on Form 10-Q for the quarter ended March 31, 1999,
as filed with the Commission on May 17, 1999 (file no. 1-10962).
10.18 Callaway Golf Company 1998 Executive Non-Discretionary Bonus Plan,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, as filed with the Commission on May 15, 1997 (file
no. 1-10962).
10.19 1991 Stock Incentive Plan (as amended and restated April 1994),
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1994, as filed with the Commission on March 31, 1995 (file no. 1-
10962).
27
<PAGE>
10.20 Amended and Restated Stock Option Plan effective April 2, 199 1,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995, as filed with the Commission on April 1, 1996 (file no. 1-
10962).
10.21 1996 Stock Option Plan (as amended and restated through April 23,
1998), incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998, as filed with the Commission on August 14, 1998
(file no. 1-10962).
10.22 Callaway Golf Company 1998 Stock Incentive Plan effective February
18, 1998, incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, as filed with the Commission on August
14, 1998 (file no. 1-10962 ).
10.23 Callaway Golf Company Non-Employee Directors Stock Option Plan (as
amended and restated through August 17, 1999), incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, as filed with the Commission on November 15, 1999 (file no. 1-
10962).
10.24 Indemnification Agreement by and between Callaway Golf Company and
William C. Baker dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.25 Indemnification Agreement by and between Callaway Golf Company and
Vernon E. Jordan, Jr. dated as of July 1, 1999, incorporated herein
by this reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, as filed with the Commission on
August 16, 1999 (file no. 1-10962).
10.26 Indemnification Agreement by and between Callaway Golf Company and
Yotaro Kobayashi dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.27 Indemnification Agreement by and between Callaway Golf Company and
Aulana L. Peters dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.28 Indemnification Agreement by and between Callaway Golf Company and
Richard L. Rosenfield dated as of July 1, 1999, incorporated herein
by this reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, as filed with the Commission on
August 16, 1999 (file no. 1-10962).
28
<PAGE>
10.29 Indemnification Agreement by and between Callaway Golf Company and
William A. Schreyer dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
Other Contracts
10.30 Credit Agreement dated as of December 30, 1998, among Callaway Golf
Company, the other Credit Parties signatory thereto, the Lenders
signatory thereto from time to time and General Electric Capital
Corporation , as Agent for the Lenders, incorporated herein by this
reference to the corresponding exhibit to the Company's Current
Report on Form 8-K dated January 28, 1999, as filed with the
Commission on January 28, 1999 (file no. 1-10962).
10.31 Amended and Restated Credit Agreement dated as of February 10, 1999,
among Callaway Golf Company, as Borrower, the other credit parties
signatory thereto, as Credit Parties, the Lenders signatory thereto
from time to time and General Electric Capital Corporation , as Agent
and Lender, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.32 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Sales Company and Odyssey Golf, Inc, incorporated
herein by this reference to the corresponding exhibit to the
Company's Current Report on Form 8-K dated February 25, 1999, as
filed with the Commission on February 25, 1999 (file no. 1-10962).
10.33 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Company, as Parent Guarantor, Callaway Golf Sales
Company, as the CGS Originator and as Servicer, and Golf Funding
Corporation, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.34 Receivables Purchase and Servicing Agreement dated as of February 10,
1999, by and among Golf Funding Corporation, as Seller, Redwood
Receivables Corporation, as Purchaser, Callaway Golf Sales Company,
as Servicer, and General Electric Capital Corporation, as Operating
Agent and Collateral Agent, incorporated herein by this reference to
the corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.35 Trust Agreement between Callaway Golf Company and Sanwa Bank
California, as Trustee, for the benefit of participating employees,
dated July 14, 1995, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, as filed with the
Commission on November 14, 1995 (file no. 1-10962).
10.36 Loan Forgiveness Agreement effective as of March 8, 1999, by and
among Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.37 Membership Interest Purchase Agreement effective as of March 8, 1999,
by and among Callaway Golf Company and Callaway Editions, Inc.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
29
<PAGE>
10.38 Loan Termination Agreement effective as of March 10, 1999, by and
among Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.39 Trademark License Agreement effective as of March 9, 1999, by and
between Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
13.1 Portions of the Company's 1999 Annual Report to Shareholders (with
the exception of the information incorporated by reference
specifically in this Report on Form 10-K, the 1999 Annual Report to
Shareholders is not deemed to be filed as a part of this Report on
Form 10-K).
21.1 List of Subsidiaries. +
23.1 Consent of Independent Accountants. +
24.1 Powers of Attorney.+
27.1 Financial Data Schedule for the Year Ended December 31, 1999.+
+ Included in this Report
(b) Reports on Form 8-K:
None.
30
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
CHAIRMAN AND FOUNDER EMPLOYMENT AGREEMENT
This First Amendment to Chairman and Founder Employment Agreement ("First
Amendment") is effective as of December 31, 1999 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").
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 March
31, 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 First
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: 1/4/00 Dated: 1/7/00
<PAGE>
EXHIBIT 10.3
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is entered into
as of January 1, 2000, by and between Callaway Golf Company, a Delaware
corporation (the "Company"), and Charles J. Yash ("Mr. Yash").
1. TERM.
----
(a) The Company hereby employs Mr. Yash and Mr. Yash hereby accepts
employment pursuant to the terms and provisions of this Agreement for the period
commencing January 1, 2000 and terminating December 31, 2002 (the "Initial
Term"), unless this Agreement is earlier terminated as hereinafter provided.
(b) On January 1, 2002, and on each January 1 thereafter (the
"Extension Dates"), the expiration date of this Agreement shall be automatically
extended one year, through December 31 of the following year, so long as (a)
this Agreement is otherwise still in full force and effect, (b) Mr. Yash is
still employed by the Company pursuant to this Agreement, (c) Mr. Yash is not
otherwise in breach of this Agreement, and (d) neither the Company nor Mr. Yash
has given notice as provided in Section 1(c) of this Agreement.
(c) At any time prior to an Extension Date, either Mr. Yash or the
Company may give written notice to the other ("Notice") that the automatic
extension of the expiration date of this Agreement pursuant to Section 1(b)
shall end with the next extension, which shall be the final such automatic
extension of the expiration date of this Agreement. Thus, if either Mr. Yash or
the Company gives Notice on or before January 1, 2002, and all other conditions
for automatic extension of the expiration date of this Agreement pursuant to
Section 1(b) exist, then on January 1, 2002 the expiration date of this
Agreement shall be extended pursuant to Section 1(b) from December 31, 2002 to
December 31, 2003, with this Agreement expiring on that date (if not earlier
terminated pursuant to its terms) without any further automatic extensions.
(d) Upon expiration of this Agreement, Mr. Yash's status shall be one
of at will employment.
2. SERVICES.
--------
(a) Mr. Yash shall serve as President of Callaway Golf Company and
President and Chief Executive Officer of Callaway Golf Ball Company. Upon the
retirement of Ely Callaway as Chief Executive Officer of Callaway Golf Company,
which is expected to occur on or before January 1, 2001, Mr. Yash shall become
Chief Executive Officer of Callaway Golf Company. Mr. Yash's duties shall be
the usual and customary duties of the offices in which he serves. Mr. Yash
shall report to Mr. Callaway until the time of Mr. Callaway's retirement;
thereafter, Mr. Yash shall report to the Board of Directors of Callaway Golf
Company.
<PAGE>
(b) Mr. Yash shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Mr. Yash agrees
------------------------
to devote his full productive time and best efforts to the performance of Mr.
Yash's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors and, as applicable, its Chief Executive Officer.
Mr. Yash further agrees, as a condition to the performance by the Company of
each and all of its obligations hereunder, that so long as Mr. Yash is employed
by the Company or otherwise receiving compensation or other consideration from
the Company, Mr. Yash will not directly or indirectly render services of any
nature to, otherwise become employed by, or otherwise participate or engage in
any other business without the Company's prior written consent. Mr. Yash
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably require. Nothing herein contained shall be deemed
to preclude Mr. Yash from having outside personal investments and involvement
with appropriate community activities, and from devoting a reasonable amount of
time to such matters, provided that this shall in no manner interfere with or
derogate from Mr. Yash's work for the Company.
4. COMPENSATION.
------------
(a) The Company agrees to pay Mr. Yash a base salary at the rate of
$700,000.00 per year. On the date Mr. Yash assumes the additional duties of
Chief Executive Officer of Callaway Golf Company, his base salary will increase
to a rate of $800,000.00 per year.
(b) The Company shall provide Mr. Yash an opportunity to earn an
annual bonus based upon participation in the Company's officer bonus plan, as it
may or may not exist from time to time. Mr. Yash acknowledges that currently
all bonuses are discretionary, that the current officer bonus plan does not
include any nondiscretionary bonus plan, and that the Company does not currently
contemplate establishing any nondiscretionary bonus plan applicable to Mr. Yash.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse Mr.
Yash for all reasonable, customary, and necessary expenses incurred in the
performance of Mr. Yash's duties hereunder. Mr. Yash shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company.
2
<PAGE>
(b) Vacation. Mr. Yash shall receive five (5) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused vacation will be carried
forward from year to year. The maximum vacation time Mr. Yash may accrue shall
be three times Mr. Yash's annual vacation benefit. The Company reserves the
right to pay Mr. Yash for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Mr. Yash's employment with the Company pursuant
--------
to this Agreement, the Company shall provide for Mr. Yash to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Mr. Yash is insurable under usual underwriting
standards, term life insurance coverage on Mr. Yash's life, payable to whomever
Mr. Yash directs, in the face amount of $2,000,000.00, provided that Mr. Yash's
physical condition does not prevent Mr. Yash from qualifying for such insurance
coverage under reasonable terms and conditions;
(iii) participate in the Company's 401(k) pension plan pursuant to
the terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time; and
(v) participate in any other benefit plans the Company provides
from time to time to senior executive officers. It is understood that benefit
plans within the meaning of this subsection do not include compensation or bonus
plans.
(d) Estate Planning and Other Perquisites. To the extent the Company
-------------------------------------
provides tax and estate planning and related services, or any other perquisites
and personal benefits to other senior executive officers generally from time to
time, such services and perquisites shall be made available to Mr. Yash on the
same terms and conditions.
(e) Club Membership. The Company shall pay the reasonable cost of
---------------
initiation associated with Mr. Yash gaining privileges at a mutually agreed upon
country club. Mr. Yash shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Mr. Yash.
(f) Stock Options. Pursuant to separate written stock option
-------------
agreements and subject to the approval of the Stock Option Committee (Employee
Plans) of the Board of Directors of the Company, beginning in January 2001, and
continuing in January of each year thereafter that this Agreement is in effect,
Mr. Yash shall be granted options to purchase at least
3
<PAGE>
200,000 shares of the Common Stock of the Company. The options shall vest as
stated in the respective stock option agreements, provided Mr. Yash is then
currently employed by the Company and not in breach of this Agreement. The
option price per share shall be the NYSE closing price of Callaway Golf Common
Stock on the date of the respective grants. The options will contain such
reasonable restrictions as determined by the Stock Option Committee (Employee
Plans), including without limitation, cancellation of options or forfeiture of
gain upon exercise if Mr. Yash discloses the Company's confidential information
or competes with the business of the Company.
6. TAX INDEMNIFICATION. Mr. Yash shall be indemnified by the Company
-------------------
for certain excise tax obligations, as more specifically set forth in Exhibit A
to this Agreement.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Mr. Yash
--------------
agrees that, while employed by the Company or otherwise receiving compensation
or other consideration from the Company (including any severance pursuant to
Section 8 of this Agreement), Mr. Yash will not, directly or indirectly (whether
as agent, consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business or venture which engages directly or
indirectly in competition with the business of the Company or any of its
affiliates, or have any interest in any person, firm, corporation, or venture
which engages directly or indirectly in competition with the business of the
Company or any of its affiliates. For purposes of this section, the ownership
of interests in a broadly based mutual fund shall not constitute ownership of
the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of
---------------
his duties hereunder, Mr. Yash shall not cause or induce, or attempt to cause or
induce, any person now or hereafter employed by the Company or any of its
affiliates to terminate such employment while employed by the Company and for a
period of one (1) year thereafter.
(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Mr. Yash shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to the Company or any of
its affiliates to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company, Mr. Yash
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Mr. Yash's duties and obligations
to the Company.
(e) Non-Interference. While employed by the Company, and for one (1)
----------------
year thereafter, Mr. Yash shall not in any way undertake to harm, injure or
disparage the Company, its officers, directors, employees, agents, affiliates,
vendors, products, or customers, or their successors, or in any other way
exhibit an attitude of hostility toward them. Mr. Yash understands that it is
the policy of the Company that the Chief Executive Officer, the
4
<PAGE>
Vice President of Press, Public and Media Relations and their specific designees
may speak to the press or media about the Company or its business.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Mr. Yash's employment
----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time. In the event of a termination by the Company for its convenience, Mr.
Yash shall be entitled to receive (i) any compensation accrued and unpaid as of
the date of termination; and (ii) the immediate vesting of all unvested stock
options held by Mr. Yash as of the date of such termination. In addition to the
foregoing, and subject to the provisions of Section 20, Mr. Yash shall be
entitled to Special Severance equal to (i) severance payments equal to Mr.
Yash's then current base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to the greater of
the remainder of the Initial Term of this Agreement or eighteen (18) months from
the date of termination; (ii) the payment of premiums owed for COBRA insurance
benefits for a period of time equal to eighteen (18) months from the date of
termination for Mr. Yash and his qualified family members; (iii) the benefits
specified in Section 5(d) (Estate Planning and Other Perquisites) for a period
of time equal to eighteen (18) months from the date of termination; and (iv) no
other severance.
(b) Termination by the Company for Substantial Cause. Mr. Yash's
------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Mr. Yash shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by Mr.
Yash to substantially perform his duties, material breach of this Agreement, or
misconduct, including but not limited to, dishonesty, theft, use or possession
of illegal drugs during work and/or felony criminal conduct.
(c) Termination by Mr. Yash for Substantial Cause. Mr. Yash's
---------------------------------------------
employment under this Agreement may be terminated immediately by Mr. Yash for
substantial cause at any time. In the event of a termination by Mr. Yash for
substantial cause, Mr. Yash shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) the immediate vesting
of all unvested stock options held by Mr. Yash as of the date of such
termination. In addition to the foregoing, and subject to the provisions of
Section 20, Mr. Yash shall be entitled to Special Severance equal to (i)
severance payments equal to Mr. Yash's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to the greater of the remainder of the Initial Term of this Agreement
or eighteen (18) months from the date of termination; (ii) the payment of
premiums owed for COBRA insurance benefits for a period of time equal to
eighteen (18) months from the date of termination for Mr. Yash and his qualified
family members; (iii) the benefits specified in Section 5(d) (Estate Planning
and Other Perquisites) for a period of time equal to eighteen (18) months from
the date of termination; and (iv) no other severance. "Substantial cause" shall
mean for purposes of this subsection a material breach of this Agreement.
5
<PAGE>
(d) Termination Due to Permanent Disability. Subject to all
---------------------------------------
applicable laws, Mr. Yash's employment under this Agreement may be terminated
immediately by the Company in the event Mr. Yash becomes permanently disabled.
Permanent disability shall be defined as Mr. Yash's failure to perform or being
unable to perform all or substantially all of Mr. Yash's duties under this
Agreement for a continuous period of more than six (6) months on account of any
physical or mental disability, either as mutually agreed to by the parties or as
reflected in the opinions of three qualified physicians, one of which has been
selected by the Company, one of which has been selected by Mr. Yash, and one of
which has been selected by the two other physicians jointly. In the event of a
termination by the Company due to Mr. Yash's permanent disability, Mr. Yash
shall be entitled to (i) any compensation accrued and unpaid as of the date of
termination; (ii) severance payments equal to Mr. Yash's former base salary at
the same rate and on the same schedule as in effect at the time of termination
for a period of time equal to twelve (12) months from the date of termination;
(iii) the immediate vesting of outstanding but unvested stock options held by
Mr. Yash as of such termination date in a prorated amount based upon the number
of days in the option vesting period that elapsed prior to Mr. Yash's
termination; (iv) the payment of premiums owed for COBRA insurance benefits for
a period of time equal to twelve (12) months from the date of termination for
Mr. Yash and his qualified family members; and (v) no other severance. The
Company shall be entitled to take, as an offset against any amounts due pursuant
to subsections (i) and (ii) above, any amounts received by Mr. Yash pursuant to
disability or other insurance, or similar sources, provided by the Company.
(e) Termination Due to Death. Mr. Yash's employment under this
-------------------------
Agreement shall be terminated immediately by the Company in the event of Mr.
Yash's death. In the event of a termination due to Mr. Yash's death, Mr. Yash's
estate shall be entitled to (i) any compensation accrued and unpaid as of the
date of death; (ii) severance payments equal to Mr. Yash's former base salary at
the same rate and on the same schedule as in effect at the time of death for a
period of time equal to twelve (12) months from the date of death; (iii) the
immediate vesting of outstanding but unvested stock options held by Mr. Yash as
of the date of death in a prorated amount based upon the number of days in the
option vesting period that elapsed prior to Mr. Yash's death; and (iv) no other
severance.
(f) Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Mr. Yash shall not be entitled to any further compensation, bonus,
damages, restitution, relocation benefits, or other severance benefits upon
termination of employment. The amounts payable to Mr. Yash pursuant to this
Section 8 shall not be treated as damages, but as severance compensation to
which Mr. Yash is entitled by reason of termination of employment under the
applicable circumstances. The Company shall not be entitled to set off against
the amounts payable to Mr. Yash hereunder any amounts earned by Mr. Yash in
other employment after termination of his employment with the Company pursuant
to this Agreement, or any amounts which might have been earned by Mr. Yash in
other employment had Mr. Yash sought such other employment. The provisions of
this Section 8 shall not limit Mr. Yash's rights under or
6
<PAGE>
pursuant to any other agreement or understanding with the Company regarding any
pension, profit sharing, insurance or other employee benefit plan of the Company
to which Mr. Yash is entitled pursuant to the terms of such plan.
(g) Termination By Mutual Agreement of the Parties. Mr. Yash's
----------------------------------------------
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
(h) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Mr. Yash to vacate his office or otherwise remain off the
Company's premises and to cease any and all activities on the Company's behalf
without such action constituting a termination of employment or a breach of this
Agreement.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit B hereto) occurs
before the termination of Mr. Yash's employment hereunder, then this Agreement
shall be automatically renewed (the "Renewed Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the Initial Term, as specified pursuant to Section 1 of this
Agreement, shall be three (3) years commencing with the effective date of the
Change in Control, and the Extension Dates shall commence with the second
anniversary of the effective date of the Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, if
upon or at any time within one (1) year following any Change in Control that
occurs during the term of this Agreement there is a Termination Event (as
defined below), Mr. Yash shall be treated as if he had been terminated for the
convenience of the Company pursuant to Section 8(a), and Mr. Yash shall be
entitled to receive the same compensation and other benefits and entitlements as
are described in Section 8(a), as appropriate, of this Agreement. Furthermore,
the provisions of Section 8 shall continue to apply during the term of the
Renewed Employment Agreement except that, in the event of a conflict between
Section 8 and the rights of Mr. Yash described in this Section 9, the provisions
of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any one or more
of the following, and in the absence of Mr. Yash's permanent disability (defined
in Section 8(d)), Mr. Yash's death, and any of the factors enumerated in Section
8(b) providing for termination by the Company for substantial cause:
(i) the termination or material breach of this Agreement by the
Company;
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
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(iii) any material diminishment in the title, position, duties,
responsibilities or status that Mr. Yash had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any
of the compensation, reimbursable expenses, stock options, incentive programs,
or other benefits or perquisites provided to Mr. Yash under the terms of this
Agreement or any other agreement or understanding between the Company and Mr.
Yash, or pursuant to the Company's policies and past practices as of the date
immediately prior to the Change in Control; or
(v) any requirement that Mr. Yash relocate or any assignment to
Mr. Yash of duties that would make it unreasonably difficult for Mr. Yash to
maintain the principal residence he had immediately prior to the Change in
Control.
10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Mr. Yash understands and
-----------------------------------------
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Mr. Yash
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Mr. Yash make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the
Company's office except as specifically authorized by the Company. Mr. Yash
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Mr. Yash's employment with the Company.
11. GENERAL RELATIONSHIP. Mr. Yash shall be considered an employee
--------------------
of the Company within the meaning of all federal, state and local laws and
regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
------------------------------------------
(a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Mr. Yash or observed by Mr. Yash, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Mr. Yash develops during the term of this Agreement in
connection with the work performed by Mr. Yash for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.
8
<PAGE>
(b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Mr. Yash; or (iii) information which, subsequent to disclosure or
observation, is obtained by Mr. Yash from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Mr. Yash) and who is not required
to refrain from disclosing such information to others.
(c) While employed by the Company, Mr. Yash will have access to and
become familiar with various Trade Secrets and Confidential Information. Mr.
Yash acknowledges that the Trade Secrets and Confidential Information are owned
and shall continue to be owned solely by the Company and/or its affiliates. Mr.
Yash agrees that he will not, at any time, whether during or subsequent to Mr.
Yash's employment by the Company and/or its affiliates, use or disclose Trade
Secrets and Confidential Information for any competitive purpose or divulge the
same to any person other than the Company or persons with respect to whom the
Company has given its written consent, unless Mr. Yash is compelled to disclose
it by governmental process. In the event Mr. Yash believes that he is legally
required to disclose any Trade Secrets or Confidential Information, Mr. Yash
shall give reasonable notice to the Company prior to disclosing such information
and shall assist the Company in taking such legally permissible steps as are
reasonable and necessary to protect the Trade Secrets or Confidential
Information, including, but not limited to, execution by the receiving party of
a non-disclosure agreement in a form acceptable to the Company.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Mr. Yash in perpetuity.
13. ASSIGNMENT OF RIGHTS.
--------------------
(a) As used in this Agreement, "Designs, Inventions and Innovations,"
whether or not they have been patented, trademarked, or copyrighted, include,
but are not limited to designs, inventions, innovations, ideas, improvements,
processes, sources of and uses for materials, apparatus, plans, systems and
computer programs relating to the design, manufacture, use, marketing,
distribution and management of the Company's and/or its affiliates' products.
(b) As a material part of the terms and understandings of this
Agreement, Mr. Yash agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Mr. Yash, alone
or with anyone else, in connection with the work performed by Mr. Yash for the
Company during his employment with the
9
<PAGE>
Company, regardless of whether they are suitable to be patented, trademarked
and/or copyrighted.
(c) Mr. Yash agrees to disclose in writing to the Board of Directors
and the Chief Legal Officer of the Company any Design, Invention or Innovation
relating to the business of the Company and/or its affiliates, which Mr. Yash
develops, conceives and/or reduces to practice in connection with any work
performed by Mr. Yash for the Company, either alone or with anyone else, while
employed by the Company and/or within twelve (12) months of the termination of
employment. Mr. Yash shall disclose all Designs, Inventions and Innovations to
the Company, even if he does not believe that he is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such Design, Invention or Innovation to the Company. If the Company
and Mr. Yash disagree as to whether or not a Design, Invention or Innovation is
included within the terms of this Agreement, it will be the responsibility of
Mr. Yash to prove that it is not included.
(d) Pursuant to California Labor Code Section 2870, the obligation to
assign as provided in this Agreement does not apply to any Design, Invention or
Innovation to the extent such obligation would conflict with any state or
federal law. The obligation to assign as provided in this Agreement does not
apply to any Design, Invention or Innovation that Mr. Yash developed entirely on
his own time without using the Company's equipment, supplies, facilities or
Trade Secrets and Confidential Information except those Designs, Inventions or
Innovations that either:
(i) Relate at the time of conception or reduction to practice to
the Company's and/or its affiliates' business, or actual or demonstrably
anticipated research of the Company and/or its affiliates; or
(ii) Result from any work performed by Mr. Yash for the Company
and/or its affiliates.
(e) Mr. Yash agrees that any Design, Invention and/or Innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company 's
request, at no expense to Mr. Yash, Mr. Yash shall execute any and all proper
applications for patents, copyrights and/or trademarks, assignments to the
Company, and all other applicable documents, and will give testimony when and
where requested to perfect the title and/or patents (both within and without the
United States) in all Designs, Inventions and Innovations belonging to the
Company.
(f) The provisions of this Section 13 shall survive the termination or
expiration of this Agreement, and shall be binding upon Mr. Yash in perpetuity.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure
----------
to the benefit of the parties hereto and the successors and assigns of the
Company. Mr. Yash shall
10
<PAGE>
have no right to assign his rights, benefits, duties, obligations or other
interests in this Agreement, it being understood that this Agreement is personal
to Mr. Yash.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees incurred in such action or proceeding as provided in Section
18(f).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Mr. Yash or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Mr. Yash and the Company
regarding employment.
17. NOTICES. Any notice, request, demand, or other communication
-------
required or permitted hereunder, shall be deemed properly given when actually
received or within five (5) days of mailing by certified or registered mail,
postage prepaid, to:
Mr. Yash: Charles J. Yash
Post Office Box 2621
Rancho Santa Fe, California 92067
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Ely Callaway
Chairman and Chief Executive Officer
or to such other address as Mr. Yash or the Company may from time to time
furnish, in writing, to the other.
18. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) Mr. Yash and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, or relating to Mr. Yash's
employment, or the termination thereof, that cannot be resolved by mutual
agreement of the parties shall be submitted to binding arbitration. This
includes, but is not limited to, alleged violations of federal, state and/or
local statutes, claims based on any purported breach of duty arising in contract
or tort, including breach of contract, breach of the covenant of good faith and
fair dealing, violation of public policy, violation of any statutory,
contractual or common law rights, but excluding workers' compensation,
unemployment matters, or any matter falling
11
<PAGE>
within the jurisdiction of the state Labor Commissioner. The parties agree that
arbitration is the parties' only recourse for such claims and hereby waive the
right to pursue such claims in any other forum, unless otherwise provided by
law. Any court action involving a dispute which is not subject to arbitration
shall be stayed pending arbitration of arbitrable disputes; provided, however,
that the parties shall have the right to seek provisional relief in an ancillary
court action in connection with an arbitrable dispute.
(b) Any demand for arbitration shall be in writing and must be
communicated to the other party within one (1) year after the discovery of the
alleged claim or cause of action by the aggrieved party, or, if later, within
the time period stated in the applicable statute of limitations.
(c) The arbitration shall be conducted pursuant to the procedural
rules stated in the National Rules for Resolution of Employment Disputes of the
American Arbitration Association ("AAA"). The arbitration shall be conducted in
San Diego by a former or retired judge or attorney with at least 10 years
experience in employment-related disputes, or a non-attorney with like
experience in the area of dispute, who shall have the power to hear motions,
control discovery, conduct hearings and otherwise do all that is necessary to
resolve the matter. The parties must mutually agree on the arbitrator. If the
parties cannot agree on the arbitrator after their best efforts, an arbitrator
from the American Arbitration Association will be selected pursuant to the
American Arbitration Association National Rules for Resolution of Employment
Disputes.
(d) The arbitration award shall be final and binding, and may be
entered as a judgment in any court having competent jurisdiction. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute. However, at a minimum, each party will be
entitled to one deposition.
(e) The parties understand and agree that the arbitrator has no
authority to award punitive damages.
(f) The prevailing party shall be entitled to an award by the
arbitrator of reasonable attorneys' fees and other costs reasonably incurred in
connection with the arbitration, including witness fees and expert witness fees,
unless the arbitrator for good cause determines otherwise.
12
<PAGE>
(g) The provisions of this Section shall survive the expiration or
termination of the Agreement, and shall be binding upon the parties.
THE PARTIES HAVE READ PARAGRAPH 18 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE.
______ (Mr. Yash) ______ (Company)
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs
--------
of this Agreement are inserted solely for the convenience of reference and are
not a part of and are not intended to govern, limit or aid in the construction
of any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract
--------------
under the internal laws of the State of California and shall be governed and
construed in accordance with the laws of said state as to both interpretation
and performance.
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
(e) Advertising Waiver. Mr. Yash agrees to permit the Company and/or
------------------
its affiliates, and persons or other organizations authorized by the Company
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of the Company and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Mr. Yash's name and/or pictures of Mr. Yash taken in the course of his
provision of services to the Company and/or its affiliates, appear. Mr. Yash
hereby waives and releases any claim or right he may otherwise have arising out
of such use, publication or distribution.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to the
-------------------------------
contrary, it is expressly understood that any obligation of the Company to pay
Special Severance pursuant to this Agreement shall be subject to:
(a) Mr. Yash's continued compliance with the terms and conditions of
Sections 7(a), 7(b), 7(c), 7(e), 12, 13 and 18;
13
<PAGE>
(b) Mr. Yash must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in
a broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and
(c) Mr. Yash must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.
21. SUPERSEDES OLD EXECUTIVE OFFICER EMPLOYMENT AND TAX INDEMNIFICATION
-------------------------------------------------------------------
AGREEMENTS. Mr. Yash and the Company recognize that prior to the effective date
- ----------
of this Agreement they were parties to a certain Officer Employment Agreement
effective May 10, 1996 (the "Old Officer Employment Agreement") and a certain
Tax Indemnification Agreement (the "Old Tax Agreement"). It is the intent of
the parties that as of the effective date of this Agreement, this Agreement
shall replace and supersede the Old Officer Employment Agreement and the Old Tax
Agreement, that the Old Officer Employment Agreement shall no longer be of any
force or effect except as to Sections 7, 12, 13, 15 and 18 thereof, and that to
the extent there is any conflict between the Old Officer Employment Agreement or
the Old Tax Agreement and this Agreement, this Agreement shall control and all
agreements shall be construed so as to give the maximum force and effect to the
provisions of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
MR. YASH COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Charles J. Yash By: /s/ Ely Callaway
____________________________ ______________________________
Charles J. Yash Ely Callaway, Chairman and CEO
14
<PAGE>
EXHIBIT A
TAX INDEMNIFICATION
Pursuant to Section 6 of Mr. Yash's Employment Agreement ("Section 6"), the
Company agrees to indemnify Mr. Yash with respect to certain excise tax
obligations as follows:
1. Definitions. For purposes of Section 6 and this Exhibit A, the
following terms shall have the meanings specified herein:
(a) "Claim" shall mean any written claim (whether in the form of a tax
assessment, proposed tax deficiency or similar written notification) by the
Internal Revenue Service or any state or local tax authority that, if
successful, would result in any Excise Tax or an Underpayment.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
All references herein to any section, subsection or other provision of the Code
shall be deemed to refer to any successor thereto.
(c) "Excise Tax" shall mean (i) any excise tax imposed by Section 4999
of the Code or any comparable federal, state or local tax, and (ii) any interest
and/or penalties incurred with respect to any tax described in 1(c)(i).
(d) Gross-Up Payment shall mean a cash payment as specified in Section
2.
(e) "Overpayment" and "Underpayment" shall have the meanings specified
in Section 4.
(f) "Payment" shall mean any payment, benefit or distribution
(including, without limitation, cash, the acceleration of the granting, vesting
or exercisability of stock options or other incentive awards, or the accrual or
continuation of any other payments or benefits) granted or paid to or for the
benefit of Mr. Yash by the Company or by any person or persons whose actions
result in a Taxable Event (as defined in this Section), or by any person
affiliated with the Company or such person(s), whether paid or payable pursuant
to the terms of this Agreement or otherwise. Notwithstanding the foregoing, a
Payment shall not include any Gross-Up Payment required under Section 6 and this
Exhibit A.
(g) "Taxable Event" shall mean any change in control or other event
which triggers the imposition of any Excise Tax on any Payment.
2. In the event that any Payment is determined to be subject to any Excise
Tax, then Mr. Yash shall be entitled to receive from the Company a Gross-Up
Payment in an amount such that, after the payment of all income taxes, Excise
Taxes and any other taxes imposed with respect to the Gross-Up Payment (together
with payment of all interest and
15
<PAGE>
penalties imposed with respect to any such taxes), Mr. Yash shall retain a net
amount of the Gross-Up Payment equal to the Excise Tax imposed with respect to
the Payments.
3. All determinations required to be made under Section 6 and this Exhibit
A, including, without limitation, whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by the accounting
firm of Pricewaterhouse Coopers LLP or, if applicable, its successor as the
Company's independent auditor (the "Accounting Firm"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Taxable Event to which a possible Gross-Up Payment is
related, another nationally recognized accounting firm that is mutually
acceptable to the Company and Mr. Yash shall be appointed to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). The Accounting Firm shall provide
detailed supporting calculations to the Company and to Mr. Yash regarding the
amount of Excise Tax (if any) which is payable, and the Gross-Up Payment (if
any) required hereunder, with respect to any Payment or Payments, with such
calculations to be provided at such time as may be requested by the Company but
in no event later than fifteen (15) business days following receipt of a written
notice from Mr. Yash that there has been a Payment that may be subject to an
Excise Tax. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment as determined pursuant to Section 6 and
this Exhibit A shall be paid by the Company to Mr. Yash within five (5) business
days after receipt of the Accounting Firm's determination. If the Accounting
Firm determines that no Excise Tax is payable by Mr. Yash, the Accounting Firm
shall furnish Mr. Yash with a written opinion that failure to disclose, report
or pay the Excise Tax on Mr. Yash's federal or other applicable tax returns will
not result in the imposition of a negligence penalty, understatement penalty or
other similar penalty. All determinations by the Accounting Firm shall be
binding upon the Company and Mr. Yash in the absence of clear and indisputable
mathematical error. Following receipt of a Gross-Up Payment as provided herein,
Mr. Yash shall be obligated to properly and timely report his Excise Tax
liability on the applicable tax returns or reports and to pay the full amount of
Excise Tax with funds provided through such Gross-Up Payment. Notwithstanding
the foregoing, if the Company reasonably determines that Mr. Yash will be unable
or otherwise may fail to make such Excise Tax payment, the Company may elect to
pay the Excise Tax to the Internal Revenue Service and/or other applicable tax
authority on behalf of Mr. Yash, in which case the Company shall pay the net
balance of the Gross-Up Payment (after deduction of such Excess Tax payment) to
Mr. Yash.
4. As a result of uncertainty in the application of Section 4999 of the
Code, it is possible that a Gross-Up Payment will not have been made by the
Company that should have been made (an "Underpayment") or that a Gross-Up
Payment is made that should not have been made (an "Overpayment"). In the event
that Mr. Yash is required to make a payment of any Excise Tax, due to an
Underpayment, the Accounting Firm shall determine the amount of Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Mr. Yash in which case Mr. Yash shall be obligated to make a timely
payment of the full amount of the applicable Excise Tax to the applicable tax
authority, provided, however, the Company may elect to pay the Excise Tax to the
applicable tax authority on
16
<PAGE>
behalf of Mr. Yash consistent with the provisions of Section 3, in which case
the Company shall pay the net balance of the Underpayment (after deduction of
such Excise Tax payment) to Mr. Yash. In the event that the Accounting Firm
determines that an Overpayment has been made, any such Overpayment shall be
repaid by Mr. Yash to the Company within ninety (90) days after written demand
to Mr. Yash by the Company, provided, however, that Mr. Yash shall have no
obligation to repay any amount of the Overpayment that has been paid to, and not
recovered from, a tax authority, provided further, however, in such event the
Company may direct Mr. Yash to prosecute a claim for a refund of such amount
consistent with the principles set forth in Section 5.
5. Mr. Yash shall notify the Company in writing of any Claim. Such notice
(a) shall be given as soon as practicable, but in no event later than fifteen
(15) business days, following Mr. Yash's receipt of written notice of the Claim
from the applicable tax authority, and (b) shall include a compete and accurate
copy of the tax authority's written Claim or otherwise fully inform the Company
of the nature of the Claim and the date on which any payment of the Claim must
be paid, provided that Mr. Yash shall not be required to give notice to the
Company of facts of which the Company is already aware, and provided further
that failure or delay by Mr. Yash to give such notice shall not constitute a
breach of Section 6 or this Exhibit A except to the extent that the Company is
prejudiced thereby. Mr. Yash shall not pay any portion of a Claim prior to the
earlier of (a) the expiration of thirty (30) days following the date on which
Mr. Yash gives the foregoing notice to the Company, (b) the date that any Excise
Tax payment under the Claim is due, or (c) the date the Company notifies Mr.
Yash that it does not intend to contest the Claim. If, prior to expiration of
such period, the Company notifies Mr. Yash in writing that it desires to contest
the Claim, Mr. Yash shall:
(a) give the Company any information reasonably requested by the
Company relating to the Claim;
(b) take such action in connection with contesting the Claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to the Claim by
an attorney selected and compensated by the Company who is reasonably acceptable
to Mr. Yash;
(c) cooperate with the Company in good faith in order to effectively
contest the Claim; and
(d) permit the Company to participate (at its expense) in any and all
proceedings and conferences pertaining to the Claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties and
attorneys' fees) incurred in connection with any such contest, and shall
indemnify and hold Mr. Yash harmless, on an after-tax basis, for any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and all costs imposed or incurred in connection with such
contests. Without limitation upon the foregoing provisions of this Section 5,
and except as
17
<PAGE>
provided below, the Company shall control all proceedings concerning any such
contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with tax authorities pertaining
to the Claim. At the written request of the Company, and upon payment to Mr.
Yash of an amount at least equal to the Claim plus any additional amount
necessary to obtain the jurisdiction of the appropriate tribunal and/or court,
Mr. Yash shall pay the same and sue for a refund or otherwise contest the Claim
in any permissible manner as directed by the Company. Mr. Yash agrees to
prosecute any contest of a Claim to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine, provided, however, that if the Company
requests Mr. Yash to pay the Claim and sue for a refund, the Company shall
indemnify and hold Mr. Yash harmless, on an after-tax basis, from any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and costs imposed or incurred in connection with such contest
or with respect to any imputed income attributable to any advances or payments
by the Company hereunder. Any extension of the statute of limitations relating
to assessment of any Excise Tax for the taxable year of Mr. Yash which is the
subject of a Claim is to be limited solely to the Claim. Furthermore, the
Company's control of a contest as provided hereunder shall be limited to issues
for which a Gross-Up Payment would be payable hereunder, and Mr. Yash shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other tax authority.
6. If Mr. Yash receives a refund from a tax authority of all or any
portion of an Excise Tax paid by or on behalf of Mr. Yash with amounts advanced
by the Company pursuant to Section 6 and this Exhibit A, Mr. Yash shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). Mr. Yash shall, if so
directed by the Company, file and otherwise prosecute a claim for refund of any
Excise Tax payment made by or on behalf of Mr. Yash with amounts advanced by the
Company pursuant to Section 6 and this Exhibit A, with any such refund claim to
be effected in accordance with the principles set forth in Section 5. If a
determination is made that Mr. Yash shall not be entitled to any refund and the
Company does not notify Mr. Yash in writing of its intent to contest such denial
of refund prior to the expiration of thirty (30) days after such determination,
then Mr. Yash shall have no further obligation hereunder to contest such denial
or to repay to the Company the amount involved in such unsuccessful refund
claim. The amount of any advances which are made by the Company in connection
with any such refund claim hereunder, to the extent not refunded by the
applicable tax authority to Mr. Yash, shall offset, as appropriate consistent
with the purposes of Section 6 and this Exhibit A, the amount of any Gross-Up
Payment required hereunder to be paid by the Company to Mr. Yash.
18
<PAGE>
EXHIBIT B
CHANGE IN CONTROL
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
2. Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
3. Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(a) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such
19
<PAGE>
reorganization or merger or consolidation (or series of related transactions
involving such a reorganization or merger or consolidation), or
(b) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
4. Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
20
<PAGE>
EXHIBIT 10.6
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is entered into
as of January 1, 2000, by and between Callaway Golf Company, a Delaware
corporation (the "Company"), and Ronald A. Drapeau ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby accepts
----
employment pursuant to the terms and provisions of this Agreement for the period
commencing January 1, 2000 and terminating December 31, 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,
Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Senior Executive Vice President,
Manufacturing, of the Company. Employee's duties shall be the usual and
customary duties of the offices in which he or she serves. Employee shall report
to such person as the Chief Executive Officer shall designate. The Board of
Directors and/or the Chief Executive Officer of the Company may change
employee's title, position and/or duties at any time.
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees to
------------------------
devote his or her full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors and its Chief Executive Officer. Employee further
agrees, as a condition to the performance by the Company of each and all of its
obligations hereunder, that so long as Employee is employed by the Company or
otherwise receiving compensation or other consideration from the Company,
Employee will not directly or indirectly render services of any nature to,
otherwise become employed by, or otherwise participate or engage in any other
business without the Company's prior written consent. Employee further agrees
to execute such secrecy, non-disclosure, patent, trademark, copyright and other
proprietary rights agreements, if any, as the Company may from time to time
reasonably require. Nothing herein contained shall be deemed to preclude
Employee from having outside personal investments and involvement with
appropriate community activities, and from devoting a reasonable amount of time
to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
4. COMPENSATION.
------------
(a) The Company agrees to pay Employee a base salary at the rate of
$500,000.00 per year.
<PAGE>
(b) The Company shall provide Employee an opportunity to earn an annual
bonus based upon participation in the Company's Executive Bonus Plan as it may
or may not exist from time to time. Employee acknowledges that all bonuses are
discretionary, that the current Executive Bonus Plan does not include any
nondiscretionary bonus plan, and that the Company does not contemplate
establishing any nondiscretionary bonus plan applicable to Employee.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the compensation
---------------------------------
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall always be subject to the
control, supervision, and direction of the Company and its Chief Executive
Officer.
(b) Vacation. Employee shall receive four (4) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused vacation will be carried
forward from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Employee's employment with the Company pursuant
--------
this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $1,000,000.00, provided that
Employee's physical condition does not prevent Employee from qualifying for such
insurance coverage under reasonable terms and conditions;
(iii) participate in the Company's 401(k) pension plan pursuant to
the terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time; and
(v) participate in any other benefit plans the Company provides
from time to time to senior executive officers. It is understood that benefit
plans within the meaning of this subsection do not include compensation or bonus
plans.
2
<PAGE>
(d) Estate Planning and Other Perquisites. To the extent the Company
-------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other senior executive officers generally from time to
time, such services and perquisites shall be made available to Employee on the
same terms and conditions.
(e) Club Membership. The Company shall pay the reasonable cost of
---------------
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee.
6. TAX INDEMNIFICATION. Employee shall be indemnified by the Company for
-------------------
certain excise tax obligations, as more specifically set forth in Exhibit A to
this Agreement.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that, while employed by the Company or otherwise receiving compensation
or other consideration from the Company, Employee will not, directly or
indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company
or any of its affiliates, or have any interest in any person, firm, corporation,
or venture which engages directly or indirectly in competition with the business
of the Company or any of its affiliates. For purposes of this section, the
ownership of interests in a broadly based mutual fund shall not constitute
ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of
-------------------
his or her duties hereunder, Employee shall not cause or induce, or attempt to
cause or induce, any person now or hereafter employed by the Company or any of
its affiliates to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company or
any of its affiliates for a period of one (1) year from the date Employee ceases
to be employed by the Company.
(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Employee shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to the Company or any of
its affiliates to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company, Employee
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
(e) Non-Interference. While employed by the Company, and for one (1)
----------------
year thereafter, Employee shall not in any way undertake to harm, injure or
disparage the Company, its officers, directors, employees, agents, affiliates,
vendors, products, or customers, or their successors, or in any other way
exhibit an attitude of hostility toward them. Employee understands that it is
the policy of the Company that only the Chief Executive Officer, the Vice
President of Press, Public and Media Relations and their specific designees
3
<PAGE>
may speak to the press or media about the Company or its business, and agrees
not to interfere with the Company's press and public relations by violating this
policy.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment
----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time. In the event of a termination by the Company for its convenience, Employee
shall be entitled to receive (i) any compensation accrued and unpaid as of the
date of termination; and (ii) the immediate vesting of all unvested stock
options held by Employee as of the date of such termination. In addition to the
foregoing, and subject to the provisions of Section 20, Employee shall be
entitled to Special Severance equal to (i) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to twenty-four (24)
months from the date of termination; (ii) the payment of premiums owed for COBRA
insurance benefits for a period of time equal to the maximum time allowable
under COBRA (currently eighteen (18) months), but not to exceed twenty-four (24)
months under any circumstances; and (iii) no other severance.
(b) Termination by the Company for Substantial Cause. Employee's
------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by
Employee to substantially perform his or her duties, breach of this Agreement,
or misconduct, including but not limited to, dishonesty, theft, use or
possession of illegal drugs during work, and/or felony criminal conduct.
(c) Termination by Employee for Substantial Cause. Employee's
---------------------------------------------
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) the immediate vesting
of all unvested stock options held by Employee as of the date of such
termination. In addition to the foregoing, and subject to the provisions of
Section 20, Employee shall be entitled to Special Severance equal to (i)
severance payments equal to Employee's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to twenty-four (24) months from the date of termination; (ii) the
payment of premiums owed for COBRA insurance benefits for a period of time equal
to the maximum time allowable under COBRA (currently eighteen (18) months), but
not to exceed twenty-four (24) months under any circumstances; and (iii) no
other severance. "Substantial cause" shall mean for purposes of this subsection
a material breach of this Agreement by the Company.
(d) Termination Due to Permanent Disability. Subject to all
---------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
Permanent disability shall be defined as Employee's failure to perform or being
unable to perform all or substantially all of Employee's duties under this
Agreement for a continuous period of more than six (6) months
4
<PAGE>
on account of any physical or mental disability, either as mutually agreed to by
the parties or as reflected in the opinions of three qualified physicians, one
of which has been selected by the Company, one of which has been selected by
Employee, and one of which has been selected by the two other physicians
jointly. In the event of a termination by the Company due to Employee's
permanent disability, Employee shall be entitled to (i) any compensation accrued
and unpaid as of the date of termination; (ii) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to twenty-four (24)
months from the date of termination; (iii) the immediate vesting of outstanding
but unvested stock options held by Employee as of such termination date in a
prorated amount based upon the number of days in the option vesting period that
elapsed prior to Employee's termination; (iv) the payment of premiums owed for
COBRA insurance benefits for a period of time equal to the maximum time
allowable under COBRA (currently eighteen (18) months), but not to exceed
twenty-four (24) months under any circumstances; and (v) no other severance. The
Company shall be entitled to take, as an offset against any amounts due pursuant
to subsections (i) and (ii) above, any amounts received by Employee pursuant to
disability or other insurance, or similar sources, provided by the Company.
(e) Termination Due to Death. Employee's employment under this Agreement
-------------------------
shall be terminated immediately by the Company in the event of Employee's death.
In the event of a termination due to Employee's death, Employee's estate shall
be entitled to (i) any compensation accrued and unpaid as of the date of death;
(ii) severance payments equal to Employee's former base salary at the same rate
and on the same schedule as in effect at the time of death for a period of time
equal to the greater of the remainder of the term of this Agreement or six (6)
months from the date of death; (iii) the immediate vesting of outstanding but
unvested stock options held by Employee as of the date of death in a prorated
amount based upon the number of days in the option vesting period that elapsed
prior to Employee's death; and (iv) no other severance.
(f) Any severance payments shall be subject to usual and customary employee
payroll practices and all applicable withholding requirements. Except for such
severance pay and other amounts specifically provided pursuant to this Section
8, Employee shall not be entitled to any further compensation, bonus, damages,
restitution, relocation benefits, or other severance benefits upon termination
of employment. The amounts payable to Employee pursuant to this Section 8 shall
not be treated as damages, but as severance compensation to which Employee is
entitled by reason of termination of employment under the applicable
circumstances. The Company shall not be entitled to set off against the amounts
payable to Employee hereunder any amounts earned by Employee in other employment
after termination of his or her employment with the Company pursuant to this
Agreement, or any amounts which might have been earned by Employee in other
employment had Employee sought such other employment. The provisions of this
Section 8 shall not limit Employee's rights under or pursuant to any other
agreement or understanding with the Company regarding any pension, profit
sharing, insurance or other employee benefit plan of the Company to which
Employee is entitled pursuant to the terms of such plan.
(g) Termination By Mutual Agreement of the Parties. Employee's employment
----------------------------------------------
pursuant to this Agreement may be terminated at any time upon the mutual
5
<PAGE>
agreement in writing of the parties. Any such termination of employment shall
have the consequences specified in such agreement.
(h) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his or her office or otherwise remain off
the Company's premises and to cease any and all activities on the Company's
behalf without such action constituting a termination of employment or a breach
of this Agreement.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit B hereto) occurs
before the termination of Employee's employment hereunder, then this Agreement
shall be extended (the "Extended Employment Agreement") in the same form and
substance as in effect immediately prior to the Change in Control, except that
the termination date, as specified pursuant to Section 1 of this Agreement,
shall be three (3) years from the effective date of the Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, if
upon or at any time within one (1) year following any Change in Control that
occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he or she had been terminated
for the convenience of the Company pursuant to Section 8(a), and Employee shall
be entitled to receive the same compensation and other benefits and entitlements
as are described in Section 8(a), as appropriate, of this Agreement.
Furthermore, the provisions of Section 8 shall continue to apply during the term
of the Extended Employment Agreement except that, in the event of a conflict
between Section 8 and the rights of Employee described in this Section 9, the
provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any one or
more of the following, and in the absence of the Employee's permanent disability
(defined in Section 8(d)), Employee's death, and any of the factors enumerated
in Section 8(b) providing for termination by the Company for substantial cause:
(i) the termination or material breach of this Agreement by the
Company;
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position, duties,
responsibilities or status that Employee had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any
of the compensation, reimbursable expenses, stock options, incentive programs,
or other benefits or perquisites provided to Employee under the terms of this
Agreement or any other agreement or understanding between the Company and
Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
6
<PAGE>
(v) any requirement that Employee relocate or any assignment to
Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee understands and
-----------------------------------------
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Employee
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Employee make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the
Company's office except as specifically authorized by the Company. Employee
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Employee's employment with the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee of the
--------------------
Company within the meaning of all federal, state and local laws and regulations,
including, but not limited to, laws and regulations governing unemployment
insurance, workers' compensation, industrial accident, labor and taxes.
12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
------------------------------------------
(a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Employee or observed by Employee, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Employee develops during the Term of this Agreement in
connection with the work performed by Employee for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.
(b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or (iii) information which, subsequent to disclosure or
observation, is obtained by Employee from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Employee) and who is not required
to refrain from disclosing such information to others.
7
<PAGE>
(c) While employed by the Company, Employee will have access to and become
familiar with various Trade Secrets and Confidential Information. Employee
acknowledges that the Trade Secrets and Confidential Information are owned and
shall continue to be owned solely by the Company and/or its affiliates.
Employee agrees that Employee will not, at any time, whether during or
subsequent to Employee's employment by the Company and/or its affiliates, use or
disclose Trade Secrets and Confidential Information for any competitive purpose
or divulge the same to any person other than the Company or persons with respect
to whom the Company has given its written consent, unless Employee is compelled
to disclose it by governmental process. In the event Employee believes that
Employee is legally required to disclose any Trade Secrets or Confidential
Information, Employee shall give reasonable notice to the Company prior to
disclosing such information and shall assist the Company in taking such legally
permissible steps as are reasonable and necessary to protect the Trade Secrets
or Confidential Information, including, but not limited to, execution by the
receiving party of a non-disclosure agreement in a form acceptable to the
Company.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. ASSIGNMENT OF RIGHTS.
--------------------
(a) As used in this Agreement, "Designs, Inventions and Innovations,"
whether or not they have been patented, trademarked, or copyrighted, include,
but are not limited to designs, inventions, innovations, ideas, improvements,
processes, sources of and uses for materials, apparatus, plans, systems and
computer programs relating to the design, manufacture, use, marketing,
distribution and management of the Company's and/or its affiliates' products.
(b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Employee, alone
or with anyone else, in connection with the work performed by Employee for the
Company during Employee's employment with the Company, regardless of whether
they are suitable to be patented, trademarked and/or copyrighted.
(c) Employee agrees to disclose in writing to the President and CEO of
the Company any Design, Invention or Innovation relating to the business of the
Company and/or its affiliates, which Employee develops, conceives and/or reduces
to practice in connection with any work performed by Employee for the Company,
either alone or with anyone else, while employed by the Company and/or within
twelve (12) months of the termination of employment. Employee shall disclose all
Designs, Inventions and Innovations to the Company, even if Employee does not
believe that he or she is required under this Agreement, or pursuant to
California Labor Code Section 2870, to assign his or her interest in such
Design, Invention or Innovation to the Company. If the Company and Employee
disagree as to whether or not a Design, Invention or Innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
8
<PAGE>
(d) Pursuant to California Labor Code Section 2870, the obligation to
assign as provided in this Agreement does not apply to any Design, Invention or
Innovation to the extent such obligation would conflict with any state or
federal law. The obligation to assign as provided in this Agreement does not
apply to any Design, Invention or Innovation that Employee developed entirely on
Employee's own time without using the Company's equipment, supplies, facilities
or Trade Secrets and Confidential Information except those Designs, Inventions
or Innovations that either:
(i) Relate at the time of conception or reduction to practice to
the Company's and/or its affiliates' business, or actual or demonstrably
anticipated research of the Company and/or its affiliates; or
(ii) Result from any work performed by Employee for the Company
and/or its affiliates.
(e) Employee agrees that any Design, Invention and/or Innovation
which is required under the provisions of this Agreement to be assigned to the
Company shall be the sole and exclusive property of the Company. Upon the
Company 's request, at no expense to Employee, Employee shall execute any and
all proper applications for patents, copyrights and/or trademarks, assignments
to the Company, and all other applicable documents, and will give testimony when
and where requested to perfect the title and/or patents (both within and without
the United States) in all Designs, Inventions and Innovations belonging to the
Company.
(f) The provisions of this Section 13 shall survive the termination
or expiration of this Agreement, and shall be binding upon Employee in
perpetuity.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall have no right to assign his rights, benefits, duties, obligations
or other interests in this Agreement, it being understood that this Agreement is
personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
-------------------------
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding as provided in Section 18(f).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Employee and the Company
regarding employment.
9
<PAGE>
17. NOTICES. Any notice, request, demand, or other communication required
-------
or permitted hereunder, shall be deemed properly given when actually received or
within five (5) days of mailing by certified or registered mail, postage
prepaid, to:
Employee: Ronald A. Drapeau
405 Bridoon Terrace
Encinitas, California 92024
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Steven C. McCracken
Executive Vice President, Chief Legal Officer
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) Employee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, or relating to Employee's
employment, or the termination thereof, that cannot be resolved by mutual
agreement of the parties shall be submitted to binding arbitration. This
includes, but is not limited to, alleged violations of federal, state and/or
local statutes, claims based on any purported breach of duty arising in contract
or tort, including breach of contract, breach of the covenant of good faith and
fair dealing, violation of public policy, violation of any statutory,
contractual or common law rights, but excluding workers' compensation,
unemployment matters, or any matter falling within the jurisdiction of the state
Labor Commissioner. The parties agree that arbitration is the parties' only
recourse for such claims and hereby waive the right to pursue such claims in any
other forum, unless otherwise provided by law. Any court action involving a
dispute which is not subject to arbitration shall be stayed pending arbitration
of arbitrable disputes; provided, however, that the parties shall have the right
to seek provisional relief in an ancillary court action in connection with an
arbitrable dispute.
(b) Any demand for arbitration shall be in writing and must be
communicated to the other party within one (1) year after the discovery of the
alleged claim or cause of action by the aggrieved party, or, if later, within
the time period stated in the applicable statute of limitations.
(c) The arbitration shall be conducted pursuant to the procedural
rules stated in the National Rules for Resolution of Employment Disputes of the
American Arbitration Association ("AAA"). The arbitration shall be conducted in
San Diego by a former or retired judge or attorney with at least 10 years
experience in employment-related disputes, or a non-attorney with like
experience in the area of dispute, who shall have the power to hear motions,
control discovery, conduct hearings and otherwise do all that is necessary to
resolve the matter. The parties must mutually agree on the arbitrator.
10
<PAGE>
If the parties cannot agree on the arbitrator after their best efforts, an
arbitrator from the American Arbitration Association will be selected pursuant
to the American Arbitration Association National Rules for Resolution of
Employment Disputes.
(d) The arbitration award shall be final and binding, and may be
entered as a judgment in any court having competent jurisdiction. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute. However, at a minimum, each party will be
entitled to one deposition.
(e) The parties understand and agree that the arbitrator has no
authority to award punitive damages.
(f) The prevailing party shall be entitled to an award by the
arbitrator of reasonable attorneys' fees and other costs reasonably incurred in
connection with the arbitration, including witness fees and expert witness fees,
unless the arbitrator for good cause determines otherwise.
(g) The provisions of this Section shall survive the expiration or
termination of the Agreement, and shall be binding upon the parties.
THE PARTIES HAVE READ PARAGRAPH 18 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE.
______ (Employee) ______ (Company)
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of this
--------
Agreement are inserted solely for the convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
(b) Waiver. Failure of either party at any time to require performance by
------
the other of any provision of this Agreement shall in no way affect that party's
rights thereafter to enforce the same, nor shall the waiver by either party of
any breach of any provision hereof be held to be a waiver of any succeeding
breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under the
--------------
internal laws of the State of California and shall be governed and construed in
accordance with the laws of said state as to both interpretation and
performance.
11
<PAGE>
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
(e) Advertising Waiver. Employee agrees to permit the Company and/or
------------------
its affiliates, and persons or other organizations authorized by the Company
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of the Company and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Employee's name and/or pictures of Employee taken in the course of
Employee's provision of services to the Company and/or its affiliates, appear.
Employee hereby waives and releases any claim or right Employee may otherwise
have arising out of such use, publication or distribution.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to the
-------------------------------
contrary, it is expressly understood that any obligation of the Company to pay
Special Severance pursuant to this Agreement shall be subject to:
(a) Employee's continued compliance with the terms and conditions of
Sections 7(a), 7(b), 7(c), 7(e), 12, 13 and 18;
(b) Employee must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in
a broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and
(c) Employee must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.
21. POSSIBLE TERMINATION OR CONTINUATION OF EMPLOYMENT. It is recognized
--------------------------------------------------
that during the term of this Agreement, Employee's employment with the Company
may be terminated by the Company pursuant to Subsection 8(a) for any reason, or
for no reason, and that there are no representations or understandings regarding
future employment, in any capacity, beyond the term of this Agreement. The
parties recognize that this Agreement contemplates a period in which both
Employee and the Company explore the possibility of an ongoing employment
relationship, with neither obligated to offer, accept or otherwise maintain such
a future relationship. In light of this uncertainty, and as a special
concession to Employee made in lieu of any and all other claims, demands, causes
of action, or other damages Employee might have against the Company arising out
of this Agreement, the employment relationship created by it, or the termination
of that employment relationship for whatever reason, it is agreed as follows:
12
<PAGE>
(a) If the Company has not offered to Employee a new employment
agreement in substantially the same form as this Agreement, with the exception
that the new employment agreement shall have a term of not less than three (3)
years, on or before November 15, 2000, Employee may deem this Agreement to have
been terminated by the Company pursuant to Section 8(a).
(b) If the Company elects not to offer Employee a new employment
agreement as provided in Subsection 21(a) above on or before November 15, 2000,
then Employee must give written notice to the Company of any election to
terminate employment pursuant to Subsections 21(a) and 8(a) on or before
December 1, 2000. Failure by Employee to deliver such written notice to the
Company on or before December 1, 2000 shall constitute a full and complete
waiver of Employee's rights pursuant to this Section.
(c) Notwithstanding anything else to the contrary, the parties may
agree in a writing, executed on behalf of both Employee and the Company, to
extend, modify, delete or otherwise change the provisions of this Section.
22. SUPERSEDES OLD EXECUTIVE OFFICER EMPLOYMENT AND TAX INDEMNIFICATION
-------------------------------------------------------------------
AGREEMENTS. Employee and the Company recognize that prior to the effective date
- ----------
of this Agreement they were parties to a certain Executive Officer Employment
Agreement effective August 11, 1997, as amended April 1, 1999 (the "Old Officer
Employment Agreement") and a certain Tax Indemnification Agreement (the "Old Tax
Agreement"). It is the intent of the parties that as of the effective date of
this Agreement, this Agreement shall replace and supersede the Old Officer
Employment Agreement and the Old Tax Agreement entirely, that the Old Officer
Employment Agreement shall no longer be of any force or effect except as to
Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there is any
conflict between the Old Officer Employment Agreement or the Old Tax Agreement
and this Agreement, this Agreement shall control and all agreements shall be
construed so as to give the maximum force and effect to the provisions of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Ronald A. Drapeau By: /s/ Ely Callaway
- ------------------------------ ------------------------------
Ronald A. Drapeau Ely Callaway, Chairman and CEO
13
<PAGE>
EXHIBIT A
TAX INDEMNIFICATION
Pursuant to Section 6 of Employee's Employment Agreement ("Section 6"), the
Company agrees to indemnify Employee with respect to certain excise tax
obligations as follows:
1. Definitions. For purposes of Section 6 and this Exhibit A, the
following terms shall have the meanings specified herein:
(a) "Claim" shall mean any written claim (whether in the form of a tax
assessment, proposed tax deficiency or similar written notification) by the
Internal Revenue Service or any state or local tax authority that, if
successful, would result in any Excise Tax or an Underpayment.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
All references herein to any section, subsection or other provision of the Code
shall be deemed to refer to any successor thereto.
(c) "Excise Tax" shall mean (i) any excise tax imposed by Section 4999
of the Code or any comparable federal, state or local tax, and (ii) any interest
and/or penalties incurred with respect to any tax described in 1(c)(i).
(d) Gross-Up Payment shall mean a cash payment as specified in Section
2.
(e) "Overpayment" and "Underpayment" shall have the meanings specified
in Section 4.
(f) "Payment" shall mean any payment, benefit or distribution
(including, without limitation, cash, the acceleration of the granting, vesting
or exercisability of stock options or other incentive awards, or the accrual or
continuation of any other payments or benefits) granted or paid to or for the
benefit of Employee by the Company or by any person or persons whose actions
result in a Taxable Event (as defined in this Section), or by any person
affiliated with the Company or such person(s), whether paid or payable pursuant
to the terms of this Agreement or otherwise. Notwithstanding the foregoing, a
Payment shall not include any Gross-Up Payment required under Section 6 and this
Exhibit A
(g) "Taxable Event" shall mean any change in control or other event
which triggers the imposition of any Excise Tax on any Payment.
2. In the event that any Payment is determined to be subject to any Excise
Tax, then Employee shall be entitled to receive from the Company a Gross-Up
Payment in an amount such that, after the payment of all income taxes, Excise
Taxes and any other taxes imposed with respect to the Gross-Up Payment (together
with payment of all interest and penalties imposed with respect to any such
taxes), Employee shall retain a net amount of the Gross-Up Payment equal to the
Excise Tax imposed with respect to the Payments.
14
<PAGE>
3. All determinations required to be made under Section 6 and this Exhibit
A, including, without limitation, whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by the accounting
firm of Pricewaterhouse Coopers LLP or, if applicable, its successor as the
Company's independent auditor (the "Accounting Firm"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Taxable Event to which a possible Gross-Up Payment is
related, another nationally recognized accounting firm that is mutually
acceptable to the Company and Employee shall be appointed to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). The Accounting Firm shall provide
detailed supporting calculations to the Company and to Employee regarding the
amount of Excise Tax (if any) which is payable, and the Gross-Up Payment (if
any) required hereunder, with respect to any Payment or Payments, with such
calculations to be provided at such time as may be requested by the Company but
in no event later than fifteen (15) business days following receipt of a written
notice from Employee that there has been a Payment that may be subject to an
Excise Tax. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment as determined pursuant to Section 6 and
this Exhibit A shall be paid by the Company to Employee within five (5) business
days after receipt of the Accounting Firm's determination. If the Accounting
Firm determines that no Excise Tax is payable by Employee, the Accounting Firm
shall furnish Employee with a written opinion that failure to disclose, report
or pay the Excise Tax on Employee's federal or other applicable tax returns will
not result in the imposition of a negligence penalty, understatement penalty or
other similar penalty. All determinations by the Accounting Firm shall be
binding upon the Company and Employee in the absence of clear and indisputable
mathematical error. Following receipt of a Gross-Up Payment as provided herein,
Employee shall be obligated to properly and timely report his Excise Tax
liability on the applicable tax returns or reports and to pay the full amount of
Excise Tax with funds provided through such Gross-Up Payment. Notwithstanding
the foregoing, if the Company reasonably determines that the Employee will be
unable or otherwise may fail to make such Excise Tax payment, the Company may
elect to pay the Excise Tax to the Internal Revenue Service and/or other
applicable tax authority on behalf of the Employee, in which case the Company
shall pay the net balance of the Gross-Up Payment (after deduction of such
Excess Tax payment) to the Employee.
4. As a result of uncertainty in the application of Section 4999 of the
Code, it is possible that a Gross-Up Payment will not have been made by the
Company that should have been made (an "Underpayment") or that a Gross-Up
Payment is made that should not have been made (an "Overpayment"). In the event
that Employee is required to make a payment of any Excise Tax, due to an
Underpayment, the Accounting Firm shall determine the amount of Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Employee in which case Employee shall be obligated to make a timely
payment of the full amount of the applicable Excise Tax to the applicable tax
authority, provided, however, the Company may elect to pay the Excise Tax to the
applicable tax authority on behalf of Employee consistent with the provisions of
Section 3, in which case the Company shall pay the net balance of the
Underpayment (after deduction of such Excise Tax payment) to Employee. In the
event that the Accounting Firm determines that an Overpayment has been made, any
such Overpayment shall be repaid by Employee to the Company within ninety (90)
days after written demand to Employee by the Company, provided, however, that
Employee shall have no obligation to repay any amount of the Overpayment that
has been paid
15
<PAGE>
to, and not recovered from, a tax authority, provided further, however, in such
event the Company may direct Employee to prosecute a claim for a refund of such
amount consistent with the principles set forth in Section 5.
5. Employee shall notify the Company in writing of any Claim. Such notice
(a) shall be given as soon as practicable, but in no event later than fifteen
(15) business days, following Employee's receipt of written notice of the Claim
from the applicable tax authority, and (b) shall include a compete and accurate
copy of the tax authority's written Claim or otherwise fully inform the Company
of the nature of the Claim and the date on which any payment of the Claim must
be paid, provided that Employee shall not be required to give notice to the
Company of facts of which the Company is already aware, and provided further
that failure or delay by Employee to give such notice shall not constitute a
breach of Section 6 or this Exhibit A except to the extent that the Company is
prejudiced thereby. Employee shall not pay any portion of a Claim prior to the
earlier of (a) the expiration of thirty (30) days following the date on which
Employee gives the foregoing notice to the Company, (b) the date that any Excise
Tax payment under the Claim is due, or (c) the date the Company notifies
Employee that it does not intend to contest the Claim. If, prior to expiration
of such period, the Company notifies Employee in writing that it desires to
contest the Claim, Employee shall:
(a) give the Company any information reasonably requested by the
Company relating to the Claim;
(b) take such action in connection with contesting the Claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to the Claim by
an attorney selected and compensated by the Company who is reasonably acceptable
to Employee;
(c) cooperate with the Company in good faith in order to effectively
contest the Claim; and
(d) permit the Company to participate (at its expense) in any and all
proceedings and conferences pertaining to the Claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties and
attorneys' fees) incurred in connection with any such contest, and shall
indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and all costs imposed or incurred in connection with such
contests. Without limitation upon the foregoing provisions of this Section 5,
and except as provided below, the Company shall control all proceedings
concerning any such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with tax
authorities pertaining to the Claim. At the written request of the Company, and
upon payment to Employee of an amount at least equal to the Claim plus any
additional amount necessary to obtain the jurisdiction of the appropriate
tribunal and/or court, Employee shall pay the same and sue for a refund or
otherwise contest the Claim in any permissible manner as directed by the
Company. Employee agrees to prosecute any contest of a Claim to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine, provided, however,
that
16
<PAGE>
if the Company requests Employee to pay the Claim and sue for a refund, the
Company shall indemnify and hold Employee harmless, on an after-tax basis, from
any Excise Tax or income tax (including, without limitation, interest and
penalties with respect thereto) and costs imposed or incurred in connection with
such contest or with respect to any imputed income attributable to any advances
or payments by the Company hereunder. Any extension of the statute of
limitations relating to assessment of any Excise Tax for the taxable year of
Employee which is the subject of a Claim is to be limited solely to the Claim.
Furthermore, the Company's control of a contest as provided hereunder shall be
limited to issues for which a Gross-Up Payment would be payable hereunder, and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other tax authority.
6. If Employee receives a refund from a tax authority of all or any
portion of an Excise Tax paid by or on behalf of Employee with amounts advanced
by the Company pursuant to Section 6 and this Exhibit A, Employee shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). Employee shall, if so
directed by the Company, file and otherwise prosecute a claim for refund of any
Excise Tax payment made by or on behalf of Employee with amounts advanced by the
Company pursuant to Section 6 and this Exhibit A, with any such refund claim to
be effected in accordance with the principles set forth in Section 5. If a
determination is made that Employee shall not be entitled to any refund and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of thirty (30) days after such determination,
then Employee shall have no further obligation hereunder to contest such denial
or to repay to the Company the amount involved in such unsuccessful refund
claim. The amount of any advances which are made by the Company in connection
with any such refund claim hereunder, to the extent not refunded by the
applicable tax authority to Employee, shall offset, as appropriate consistent
with the purposes of Section 6 and this Exhibit A, the amount of any Gross-Up
Payment required hereunder to be paid by the Company to Employee.
17
<PAGE>
EXHIBIT B
CHANGE IN CONTROL
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
2. Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
3. Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(a) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or
18
<PAGE>
(b) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
4. Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
19
<PAGE>
EXHIBIT 10.7
------------
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is entered into
as of January 1, 2000, by and between Callaway Golf Company, a Delaware
corporation (the "Company"), and Steven C. McCracken ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby accepts
----
employment pursuant to the terms and provisions of this Agreement for the period
commencing January 1, 2000 and terminating December 31, 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,
Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Executive Vice President, Licensing, Chief
Legal Officer and Secretary, of the Company. Employee's duties shall be the
usual and customary duties of the offices in which he or she serves. Employee
shall report to such person as the Chief Executive Officer shall designate. The
Board of Directors and/or the Chief Executive Officer of the Company may change
employee's title, position and/or duties at any time.
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees to
------------------------
devote his or her full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors and its Chief Executive Officer. Employee further
agrees, as a condition to the performance by the Company of each and all of its
obligations hereunder, that so long as Employee is employed by the Company or
otherwise receiving compensation or other consideration from the Company,
Employee will not directly or indirectly render services of any nature to,
otherwise become employed by, or otherwise participate or engage in any other
business without the Company's prior written consent. Employee further agrees
to execute such secrecy, non-disclosure, patent, trademark, copyright and other
proprietary rights agreements, if any, as the Company may from time to time
reasonably require. Nothing herein contained shall be deemed to preclude
Employee from having outside personal investments and involvement with
appropriate community activities, and from devoting a reasonable amount of time
to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
4. COMPENSATION.
------------
(a) The Company agrees to pay Employee a base salary at the rate of
$450,000.00 per year.
<PAGE>
(b) The Company shall provide Employee an opportunity to earn an annual
bonus based upon participation in the Company's Executive Bonus Plan as it may
or may not exist from time to time. Employee acknowledges that all bonuses are
discretionary, that the current Executive Bonus Plan does not include any
nondiscretionary bonus plan, and that the Company does not contemplate
establishing any nondiscretionary bonus plan applicable to Employee.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the compensation
---------------------------------
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall always be subject to the
control, supervision, and direction of the Company and its Chief Executive
Officer.
(b) Vacation. Employee shall receive four (4) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused vacation will be carried
forward from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Employee's employment with the Company pursuant
--------
to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and
disability insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $1,000,000.00, provided that
Employee's physical condition does not prevent Employee from qualifying for such
insurance coverage under reasonable terms and conditions;
(iii) participate in the Company's 401(k) pension plan pursuant
to the terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred
Compensation Plan, as the same may be modified from time to time; and
(v) participate in any other benefit plans the Company provides
from time to time to senior executive officers. It is understood that benefit
plans within the meaning of this subsection do not include compensation or bonus
plans.
2
<PAGE>
(d) Estate Planning and Other Perquisites. To the extent the Company
-------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other senior executive officers generally from time to
time, such services and perquisites shall be made available to Employee on the
same terms and conditions.
(e) Club Membership. The Company shall pay the reasonable cost of
---------------
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee.
6. TAX INDEMNIFICATION. Employee shall be indemnified by the Company for
-------------------
certain excise tax obligations, as more specifically set forth in Exhibit A to
this Agreement.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that, while employed by the Company or otherwise receiving compensation
or other consideration from the Company, Employee will not, directly or
indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company
or any of its affiliates, or have any interest in any person, firm, corporation,
or venture which engages directly or indirectly in competition with the business
of the Company or any of its affiliates. For purposes of this section, the
ownership of interests in a broadly based mutual fund shall not constitute
ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of his
---------------
or her duties hereunder, Employee shall not cause or induce, or attempt to cause
or induce, any person now or hereafter employed by the Company or any of its
affiliates to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company or
any of its affiliates for a period of one (1) year from the date Employee ceases
to be employed by the Company.
(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Employee shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to the Company or any of
its affiliates to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company, Employee shall
--------------------
not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
(e) Non-Interference. While employed by the Company, and for one (1) year
----------------
thereafter, Employee shall not in any way undertake to harm, injure or disparage
the Company, its officers, directors, employees, agents, affiliates, vendors,
products, or customers, or their successors, or in any other way exhibit an
attitude of hostility toward them. Employee understands that it is the policy of
the Company that only the Chief Executive Officer, the Vice President of Press,
Public and Media Relations and their specific designees
3
<PAGE>
may speak to the press or media about the Company or its business, and agrees
not to interfere with the Company's press and public relations by violating this
policy.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment
----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time. In the event of a termination by the Company for its convenience, Employee
shall be entitled to receive (i) any compensation accrued and unpaid as of the
date of termination; and (ii) the immediate vesting of all unvested stock
options held by Employee as of the date of such termination. In addition to the
foregoing, and subject to the provisions of Section 20, Employee shall be
entitled to Special Severance equal to (i) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to twenty-four (24)
months from the date of termination; (ii) the payment of premiums owed for COBRA
insurance benefits for a period of time equal to the maximum time allowable
under COBRA (currently eighteen (18) months), but not to exceed twenty-four (24)
months under any circumstances; and (iii) no other severance.
(b) Termination by the Company for Substantial Cause. Employee's
------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by
Employee to substantially perform his or her duties, breach of this Agreement,
or misconduct, including but not limited to, dishonesty, theft, use or
possession of illegal drugs during work, and/or felony criminal conduct.
(c) Termination by Employee for Substantial Cause. Employee's
---------------------------------------------
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) the immediate vesting
of all unvested stock options held by Employee as of the date of such
termination. In addition to the foregoing, and subject to the provisions of
Section 20, Employee shall be entitled to Special Severance equal to (i)
severance payments equal to Employee's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to twenty-four (24) months from the date of termination; (ii) the
payment of premiums owed for COBRA insurance benefits for a period of time equal
to the maximum time allowable under COBRA (currently eighteen (18) months), but
not to exceed twenty-four (24) months under any circumstances; and (iii) no
other severance. "Substantial cause" shall mean for purposes of this subsection
a material breach of this Agreement by the Company.
(d) Termination Due to Permanent Disability. Subject to all applicable
---------------------------------------
laws, Employee's employment under this Agreement may be terminated immediately
by the Company in the event Employee becomes permanently disabled. Permanent
disability shall be defined as Employee's failure to perform or being unable to
perform all or substantially all of Employee's duties under this Agreement for a
continuous period of more than six (6) months
4
<PAGE>
on account of any physical or mental disability, either as mutually agreed to by
the parties or as reflected in the opinions of three qualified physicians, one
of which has been selected by the Company, one of which has been selected by
Employee, and one of which has been selected by the two other physicians
jointly. In the event of a termination by the Company due to Employee's
permanent disability, Employee shall be entitled to (i) any compensation accrued
and unpaid as of the date of termination; (ii) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to twenty-four (24)
months from the date of termination; (iii) the immediate vesting of outstanding
but unvested stock options held by Employee as of such termination date in a
prorated amount based upon the number of days in the option vesting period that
elapsed prior to Employee's termination; (iv) the payment of premiums owed for
COBRA insurance benefits for a period of time equal to the maximum time
allowable under COBRA (currently eighteen (18) months), but not to exceed
twenty-four (24) months under any circumstances; and (v) no other severance. The
Company shall be entitled to take, as an offset against any amounts due pursuant
to subsections (i) and (ii) above, any amounts received by Employee pursuant to
disability or other insurance, or similar sources, provided by the Company.
(e) Termination Due to Death. Employee's employment under this Agreement
-------------------------
shall be terminated immediately by the Company in the event of Employee's death.
In the event of a termination due to Employee's death, Employee's estate shall
be entitled to (i) any compensation accrued and unpaid as of the date of death;
(ii) severance payments equal to Employee's former base salary at the same rate
and on the same schedule as in effect at the time of death for a period of time
equal to the greater of the remainder of the term of this Agreement or six (6)
months from the date of death; (iii) the immediate vesting of outstanding but
unvested stock options held by Employee as of the date of death in a prorated
amount based upon the number of days in the option vesting period that elapsed
prior to Employee's death; and (iv) no other severance.
(f) Any severance payments shall be subject to usual and customary employee
payroll practices and all applicable withholding requirements. Except for such
severance pay and other amounts specifically provided pursuant to this Section
8, Employee shall not be entitled to any further compensation, bonus, damages,
restitution, relocation benefits, or other severance benefits upon termination
of employment. The amounts payable to Employee pursuant to this Section 8 shall
not be treated as damages, but as severance compensation to which Employee is
entitled by reason of termination of employment under the applicable
circumstances. The Company shall not be entitled to set off against the amounts
payable to Employee hereunder any amounts earned by Employee in other employment
after termination of his or her employment with the Company pursuant to this
Agreement, or any amounts which might have been earned by Employee in other
employment had Employee sought such other employment. The provisions of this
Section 8 shall not limit Employee's rights under or pursuant to any other
agreement or understanding with the Company regarding any pension, profit
sharing, insurance or other employee benefit plan of the Company to which
Employee is entitled pursuant to the terms of such plan.
(g) Termination By Mutual Agreement of the Parties. Employee's employment
----------------------------------------------
pursuant to this Agreement may be terminated at any time upon the mutual
5
<PAGE>
agreement in writing of the parties. Any such termination of employment shall
have the consequences specified in such agreement.
(h) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his or her office or otherwise remain off
the Company's premises and to cease any and all activities on the Company's
behalf without such action constituting a termination of employment or a breach
of this Agreement.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit B hereto) occurs before
the termination of Employee's employment hereunder, then this Agreement shall be
extended (the "Extended Employment Agreement") in the same form and substance as
in effect immediately prior to the Change in Control, except that the
termination date, as specified pursuant to Section 1 of this Agreement, shall be
three (3) years from the effective date of the Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, if
upon or at any time within one (1) year following any Change in Control that
occurs during the term of this Agreement there is a Termination Event (as
defined below), Employee shall be treated as if he or she had been terminated
for the convenience of the Company pursuant to Section 8(a), and Employee shall
be entitled to receive the same compensation and other benefits and entitlements
as are described in Section 8(a), as appropriate, of this Agreement.
Furthermore, the provisions of Section 8 shall continue to apply during the term
of the Extended Employment Agreement except that, in the event of a conflict
between Section 8 and the rights of Employee described in this Section 9, the
provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any one or more of
the following, and in the absence of the Employee's permanent disability
(defined in Section 8(d)), Employee's death, and any of the factors enumerated
in Section 8(b) providing for termination by the Company for substantial cause:
(i) the termination or material breach of this Agreement by the
Company;
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position, duties,
responsibilities or status that Employee had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any of
the compensation, reimbursable expenses, stock options, incentive programs, or
other benefits or perquisites provided to Employee under the terms of this
Agreement or any other agreement or understanding between the Company and
Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
6
<PAGE>
(v) any requirement that Employee relocate or any assignment to
Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee understands and
-----------------------------------------
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Employee
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Employee make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the
Company's office except as specifically authorized by the Company. Employee
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Employee's employment with the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee of the
--------------------
Company within the meaning of all federal, state and local laws and regulations,
including, but not limited to, laws and regulations governing unemployment
insurance, workers' compensation, industrial accident, labor and taxes.
12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
------------------------------------------
(a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Employee or observed by Employee, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Employee develops during the Term of this Agreement in
connection with the work performed by Employee for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.
(b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or (iii) information which, subsequent to disclosure or
observation, is obtained by Employee from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Employee) and who is not required
to refrain from disclosing such information to others.
7
<PAGE>
(c) While employed by the Company, Employee will have access to and
become familiar with various Trade Secrets and Confidential Information.
Employee acknowledges that the Trade Secrets and Confidential Information are
owned and shall continue to be owned solely by the Company and/or its
affiliates. Employee agrees that Employee will not, at any time, whether during
or subsequent to Employee's employment by the Company and/or its affiliates, use
or disclose Trade Secrets and Confidential Information for any competitive
purpose or divulge the same to any person other than the Company or persons with
respect to whom the Company has given its written consent, unless Employee is
compelled to disclose it by governmental process. In the event Employee believes
that Employee is legally required to disclose any Trade Secrets or Confidential
Information, Employee shall give reasonable notice to the Company prior to
disclosing such information and shall assist the Company in taking such legally
permissible steps as are reasonable and necessary to protect the Trade Secrets
or Confidential Information, including, but not limited to, execution by the
receiving party of a non-disclosure agreement in a form acceptable to the
Company.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. ASSIGNMENT OF RIGHTS.
--------------------
(a) As used in this Agreement, "Designs, Inventions and Innovations,"
whether or not they have been patented, trademarked, or copyrighted, include,
but are not limited to designs, inventions, innovations, ideas, improvements,
processes, sources of and uses for materials, apparatus, plans, systems and
computer programs relating to the design, manufacture, use, marketing,
distribution and management of the Company's and/or its affiliates' products.
(b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Employee, alone
or with anyone else, in connection with the work performed by Employee for the
Company during Employee's employment with the Company, regardless of whether
they are suitable to be patented, trademarked and/or copyrighted.
(c) Employee agrees to disclose in writing to the President and CEO of
the Company any Design, Invention or Innovation relating to the business of the
Company and/or its affiliates, which Employee develops, conceives and/or reduces
to practice in connection with any work performed by Employee for the Company,
either alone or with anyone else, while employed by the Company and/or within
twelve (12) months of the termination of employment. Employee shall disclose all
Designs, Inventions and Innovations to the Company, even if Employee does not
believe that he or she is required under this Agreement, or pursuant to
California Labor Code Section 2870, to assign his or her interest in such
Design, Invention or Innovation to the Company. If the Company and Employee
disagree as to whether or not a Design, Invention or Innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
8
<PAGE>
(d) Pursuant to California Labor Code Section 2870, the obligation to
assign as provided in this Agreement does not apply to any Design, Invention or
Innovation to the extent such obligation would conflict with any state or
federal law. The obligation to assign as provided in this Agreement does not
apply to any Design, Invention or Innovation that Employee developed entirely on
Employee's own time without using the Company's equipment, supplies, facilities
or Trade Secrets and Confidential Information except those Designs, Inventions
or Innovations that either:
(i) Relate at the time of conception or reduction to practice to
the Company's and/or its affiliates' business, or actual or demonstrably
anticipated research of the Company and/or its affiliates; or
(ii) Result from any work performed by Employee for the Company
and/or its affiliates.
(e) Employee agrees that any Design, Invention and/or Innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company 's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, copyrights and/or trademarks, assignments to the
Company, and all other applicable documents, and will give testimony when and
where requested to perfect the title and/or patents (both within and without the
United States) in all Designs, Inventions and Innovations belonging to the
Company.
(f) The provisions of this Section 13 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall have no right to assign his rights, benefits, duties, obligations
or other interests in this Agreement, it being understood that this Agreement is
personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
-------------------------
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding as provided in Section 18(f).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Employee and the Company
regarding employment.
9
<PAGE>
17. NOTICES. Any notice, request, demand, or other communication required
-------
or permitted hereunder, shall be deemed properly given when actually received or
within five (5) days of mailing by certified or registered mail, postage
prepaid, to:
Employee: Steven C. McCracken
5186 Chelterham Terrace
San Diego, California 92130
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Ely Callaway
Chairman and Chief Executive Officer
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) Employee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, or relating to Employee's
employment, or the termination thereof, that cannot be resolved by mutual
agreement of the parties shall be submitted to binding arbitration. This
includes, but is not limited to, alleged violations of federal, state and/or
local statutes, claims based on any purported breach of duty arising in contract
or tort, including breach of contract, breach of the covenant of good faith and
fair dealing, violation of public policy, violation of any statutory,
contractual or common law rights, but excluding workers' compensation,
unemployment matters, or any matter falling within the jurisdiction of the state
Labor Commissioner. The parties agree that arbitration is the parties' only
recourse for such claims and hereby waive the right to pursue such claims in any
other forum, unless otherwise provided by law. Any court action involving a
dispute which is not subject to arbitration shall be stayed pending arbitration
of arbitrable disputes; provided, however, that the parties shall have the right
to seek provisional relief in an ancillary court action in connection with an
arbitrable dispute.
(b) Any demand for arbitration shall be in writing and must be
communicated to the other party within one (1) year after the discovery of the
alleged claim or cause of action by the aggrieved party, or, if later, within
the time period stated in the applicable statute of limitations.
(c) The arbitration shall be conducted pursuant to the procedural
rules stated in the National Rules for Resolution of Employment Disputes of the
American Arbitration Association ("AAA"). The arbitration shall be conducted in
San Diego by a former or retired judge or attorney with at least 10 years
experience in employment-related disputes, or a non-attorney with like
experience in the area of dispute, who shall have the power to hear motions,
control discovery, conduct hearings and otherwise do all that is necessary to
resolve the matter. The parties must mutually agree on the arbitrator.
10
<PAGE>
If the parties cannot agree on the arbitrator after their best efforts, an
arbitrator from the American Arbitration Association will be selected pursuant
to the American Arbitration Association National Rules for Resolution of
Employment Disputes.
(d) The arbitration award shall be final and binding, and may be
entered as a judgment in any court having competent jurisdiction. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute. However, at a minimum, each party will be
entitled to one deposition.
(e) The parties understand and agree that the arbitrator has no
authority to award punitive damages.
(f) The prevailing party shall be entitled to an award by the
arbitrator of reasonable attorneys' fees and other costs reasonably incurred in
connection with the arbitration, including witness fees and expert witness fees,
unless the arbitrator for good cause determines otherwise.
(g) The provisions of this Section shall survive the expiration or
termination of the Agreement, and shall be binding upon the parties.
THE PARTIES HAVE READ PARAGRAPH 18 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE.
______ (Employee) ______ (Company)
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of
--------
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under
--------------
the internal laws of the State of California and shall be governed and construed
in accordance with the laws of said state as to both interpretation and
performance.
11
<PAGE>
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
(e) Advertising Waiver. Employee agrees to permit the Company and/or
------------------
its affiliates, and persons or other organizations authorized by the Company
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of the Company and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Employee's name and/or pictures of Employee taken in the course of
Employee's provision of services to the Company and/or its affiliates, appear.
Employee hereby waives and releases any claim or right Employee may otherwise
have arising out of such use, publication or distribution.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to the
-------------------------------
contrary, it is expressly understood that any obligation of the Company to pay
Special Severance pursuant to this Agreement shall be subject to:
(a) Employee's continued compliance with the terms and conditions of
Sections 7(a), 7(b), 7(c), 7(e), 12, 13 and 18;
(b) Employee must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in
a broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and
(c) Employee must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.
21. POSSIBLE TERMINATION OR CONTINUATION OF EMPLOYMENT. It is recognized
--------------------------------------------------
that during the term of this Agreement, Employee's employment with the Company
may be terminated by the Company pursuant to Subsection 8(a) for any reason, or
for no reason, and that there are no representations or understandings regarding
future employment, in any capacity, beyond the term of this Agreement. The
parties recognize that this Agreement contemplates a period in which both
Employee and the Company explore the possibility of an ongoing employment
relationship, with neither obligated to offer, accept or otherwise maintain such
a future relationship. In light of this uncertainty, and as a special
concession to Employee made in lieu of any and all other claims, demands, causes
of action, or other damages Employee might have against the Company arising out
of this Agreement, the employment relationship created by it, or the termination
of that employment relationship for whatever reason, it is agreed as follows:
12
<PAGE>
(a) If the Company has not offered to Employee a new employment
agreement in substantially the same form as this Agreement, with the exception
that the new employment agreement shall have a term of not less than three (3)
years, on or before November 15, 2000, Employee may deem this Agreement to have
been terminated by the Company pursuant to Section 8(a).
(b) If the Company elects not to offer Employee a new employment
agreement as provided in Subsection 21(a) above on or before November 15, 2000,
then Employee must give written notice to the Company of any election to
terminate employment pursuant to Subsections 21(a) and 8(a) on or before
December 1, 2000. Failure by Employee to deliver such written notice to the
Company on or before December 1, 2000 shall constitute a full and complete
waiver of Employee's rights pursuant to this Section.
(c) Notwithstanding anything else to the contrary, the parties may
agree in a writing, executed on behalf of both Employee and the Company, to
extend, modify, delete or otherwise change the provisions of this Section.
22. SUPERSEDES OLD EXECUTIVE OFFICER EMPLOYMENT AND TAX INDEMNIFICATION
-------------------------------------------------------------------
AGREEMENTS. Employee and the Company recognize that prior to the effective date
- ----------
of this Agreement they were parties to a certain Executive Officer Employment
Agreement effective January 1, 1997, as amended April 1, 1999 (the "Old Officer
Employment Agreement") and a certain Tax Indemnification Agreement (the "Old Tax
Agreement"). It is the intent of the parties that as of the effective date of
this Agreement, this Agreement shall replace and supersede the Old Officer
Employment Agreement and the Old Tax Agreement entirely, that the Old Officer
Employment Agreement shall no longer be of any force or effect except as to
Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there is any
conflict between the Old Officer Employment Agreement or the Old Tax Agreement
and this Agreement, this Agreement shall control and all agreements shall be
construed so as to give the maximum force and effect to the provisions of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Steven C. McCracken By: /s/ Ely Callaway
____________________________ ______________________________
Steven C. McCracken Ely Callaway, Chairman and CEO
13
<PAGE>
EXHIBIT A
TAX INDEMNIFICATION
Pursuant to Section 6 of Employee's Employment Agreement ("Section 6"), the
Company agrees to indemnify Employee with respect to certain excise tax
obligations as follows:
1. Definitions. For purposes of Section 6 and this Exhibit A, the
following terms shall have the meanings specified herein:
(a) "Claim" shall mean any written claim (whether in the form of a tax
assessment, proposed tax deficiency or similar written notification) by the
Internal Revenue Service or any state or local tax authority that, if
successful, would result in any Excise Tax or an Underpayment.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
All references herein to any section, subsection or other provision of the Code
shall be deemed to refer to any successor thereto.
(c) "Excise Tax" shall mean (i) any excise tax imposed by Section 4999
of the Code or any comparable federal, state or local tax, and (ii) any interest
and/or penalties incurred with respect to any tax described in 1(c)(i).
(d) Gross-Up Payment shall mean a cash payment as specified in Section
2.
(e) "Overpayment" and "Underpayment" shall have the meanings specified
in Section 4.
(f) "Payment" shall mean any payment, benefit or distribution
(including, without limitation, cash, the acceleration of the granting, vesting
or exercisability of stock options or other incentive awards, or the accrual or
continuation of any other payments or benefits) granted or paid to or for the
benefit of Employee by the Company or by any person or persons whose actions
result in a Taxable Event (as defined in this Section), or by any person
affiliated with the Company or such person(s), whether paid or payable pursuant
to the terms of this Agreement or otherwise. Notwithstanding the foregoing, a
Payment shall not include any Gross-Up Payment required under Section 6 and this
Exhibit A
(g) "Taxable Event" shall mean any change in control or other event
which triggers the imposition of any Excise Tax on any Payment.
2. In the event that any Payment is determined to be subject to any
Excise Tax, then Employee shall be entitled to receive from the Company a Gross-
Up Payment in an amount such that, after the payment of all income taxes, Excise
Taxes and any other taxes imposed with respect to the Gross-Up Payment (together
with payment of all interest and penalties imposed with respect to any such
taxes), Employee shall retain a net amount of the Gross-Up Payment equal to the
Excise Tax imposed with respect to the Payments.
14
<PAGE>
3. All determinations required to be made under Section 6 and this Exhibit
A, including, without limitation, whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by the accounting
firm of Pricewaterhouse Coopers LLP or, if applicable, its successor as the
Company's independent auditor (the "Accounting Firm"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Taxable Event to which a possible Gross-Up Payment is
related, another nationally recognized accounting firm that is mutually
acceptable to the Company and Employee shall be appointed to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). The Accounting Firm shall provide
detailed supporting calculations to the Company and to Employee regarding the
amount of Excise Tax (if any) which is payable, and the Gross-Up Payment (if
any) required hereunder, with respect to any Payment or Payments, with such
calculations to be provided at such time as may be requested by the Company but
in no event later than fifteen (15) business days following receipt of a written
notice from Employee that there has been a Payment that may be subject to an
Excise Tax. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment as determined pursuant to Section 6 and
this Exhibit A shall be paid by the Company to Employee within five (5) business
days after receipt of the Accounting Firm's determination. If the Accounting
Firm determines that no Excise Tax is payable by Employee, the Accounting Firm
shall furnish Employee with a written opinion that failure to disclose, report
or pay the Excise Tax on Employee's federal or other applicable tax returns will
not result in the imposition of a negligence penalty, understatement penalty or
other similar penalty. All determinations by the Accounting Firm shall be
binding upon the Company and Employee in the absence of clear and indisputable
mathematical error. Following receipt of a Gross-Up Payment as provided herein,
Employee shall be obligated to properly and timely report his Excise Tax
liability on the applicable tax returns or reports and to pay the full amount of
Excise Tax with funds provided through such Gross-Up Payment. Notwithstanding
the foregoing, if the Company reasonably determines that the Employee will be
unable or otherwise may fail to make such Excise Tax payment, the Company may
elect to pay the Excise Tax to the Internal Revenue Service and/or other
applicable tax authority on behalf of the Employee, in which case the Company
shall pay the net balance of the Gross-Up Payment (after deduction of such
Excess Tax payment) to the Employee.
4. As a result of uncertainty in the application of Section 4999 of the
Code, it is possible that a Gross-Up Payment will not have been made by the
Company that should have been made (an "Underpayment") or that a Gross-Up
Payment is made that should not have been made (an "Overpayment"). In the event
that Employee is required to make a payment of any Excise Tax, due to an
Underpayment, the Accounting Firm shall determine the amount of Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Employee in which case Employee shall be obligated to make a timely
payment of the full amount of the applicable Excise Tax to the applicable tax
authority, provided, however, the Company may elect to pay the Excise Tax to the
applicable tax authority on behalf of Employee consistent with the provisions of
Section 3, in which case the Company shall pay the net balance of the
Underpayment (after deduction of such Excise Tax payment) to Employee. In the
event that the Accounting Firm determines that an Overpayment has been made, any
such Overpayment shall be repaid by Employee to the Company within ninety (90)
days after written demand to Employee by the Company, provided, however, that
Employee shall have no obligation to repay any amount of the Overpayment that
has been paid
15
<PAGE>
to, and not recovered from, a tax authority, provided further, however, in such
event the Company may direct Employee to prosecute a claim for a refund of such
amount consistent with the principles set forth in Section 5.
5. Employee shall notify the Company in writing of any Claim. Such notice
(a) shall be given as soon as practicable, but in no event later than fifteen
(15) business days, following Employee's receipt of written notice of the Claim
from the applicable tax authority, and (b) shall include a compete and accurate
copy of the tax authority's written Claim or otherwise fully inform the Company
of the nature of the Claim and the date on which any payment of the Claim must
be paid, provided that Employee shall not be required to give notice to the
Company of facts of which the Company is already aware, and provided further
that failure or delay by Employee to give such notice shall not constitute a
breach of Section 6 or this Exhibit A except to the extent that the Company is
prejudiced thereby. Employee shall not pay any portion of a Claim prior to the
earlier of (a) the expiration of thirty (30) days following the date on which
Employee gives the foregoing notice to the Company, (b) the date that any Excise
Tax payment under the Claim is due, or (c) the date the Company notifies
Employee that it does not intend to contest the Claim. If, prior to expiration
of such period, the Company notifies Employee in writing that it desires to
contest the Claim, Employee shall:
(a) give the Company any information reasonably requested by the
Company relating to the Claim;
(b) take such action in connection with contesting the Claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to the Claim by
an attorney selected and compensated by the Company who is reasonably acceptable
to Employee;
(c) cooperate with the Company in good faith in order to effectively
contest the Claim; and
(d) permit the Company to participate (at its expense) in any and all
proceedings and conferences pertaining to the Claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties and
attorneys' fees) incurred in connection with any such contest, and shall
indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and all costs imposed or incurred in connection with such
contests. Without limitation upon the foregoing provisions of this Section 5,
and except as provided below, the Company shall control all proceedings
concerning any such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with tax
authorities pertaining to the Claim. At the written request of the Company, and
upon payment to Employee of an amount at least equal to the Claim plus any
additional amount necessary to obtain the jurisdiction of the appropriate
tribunal and/or court, Employee shall pay the same and sue for a refund or
otherwise contest the Claim in any permissible manner as directed by the
Company. Employee agrees to prosecute any contest of a Claim to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine, provided, however,
that
16
<PAGE>
if the Company requests Employee to pay the Claim and sue for a refund, the
Company shall indemnify and hold Employee harmless, on an after-tax basis, from
any Excise Tax or income tax (including, without limitation, interest and
penalties with respect thereto) and costs imposed or incurred in connection with
such contest or with respect to any imputed income attributable to any advances
or payments by the Company hereunder. Any extension of the statute of
limitations relating to assessment of any Excise Tax for the taxable year of
Employee which is the subject of a Claim is to be limited solely to the Claim.
Furthermore, the Company's control of a contest as provided hereunder shall be
limited to issues for which a Gross-Up Payment would be payable hereunder, and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other tax authority.
6. If Employee receives a refund from a tax authority of all or any
portion of an Excise Tax paid by or on behalf of Employee with amounts advanced
by the Company pursuant to Section 6 and this Exhibit A, Employee shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). Employee shall, if so
directed by the Company, file and otherwise prosecute a claim for refund of any
Excise Tax payment made by or on behalf of Employee with amounts advanced by the
Company pursuant to Section 6 and this Exhibit A, with any such refund claim to
be effected in accordance with the principles set forth in Section 5. If a
determination is made that Employee shall not be entitled to any refund and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of thirty (30) days after such determination,
then Employee shall have no further obligation hereunder to contest such denial
or to repay to the Company the amount involved in such unsuccessful refund
claim. The amount of any advances which are made by the Company in connection
with any such refund claim hereunder, to the extent not refunded by the
applicable tax authority to Employee, shall offset, as appropriate consistent
with the purposes of Section 6 and this Exhibit A, the amount of any Gross-Up
Payment required hereunder to be paid by the Company to Employee.
17
<PAGE>
EXHIBIT B
CHANGE IN CONTROL
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
2. Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
3. Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(a) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or
18
<PAGE>
(b) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
4. Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
19
<PAGE>
EXHIBIT 10.8
EXECUTIVE OFFICER EMPLOYMENT AGREEMENT
This Executive Officer Employment Agreement ("Agreement") is entered into
as of December 21, 1999, by and between Callaway Golf Company, a Delaware
corporation (the "Company"), and Mick McCormick ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby accepts
----
employment pursuant to the terms and provisions of this Agreement for the period
commencing January 10, 2000 and terminating December 31, 2002 unless this
Agreement is earlier terminated as hereinafter provided. Unless such employment
is earlier terminated, upon the expiration of the term of this Agreement,
Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as Executive Vice President, Global Sales, of
the Company. Employee's duties shall be the usual and customary duties of the
offices in which he or she serves. Employee shall report to the Chief Executive
Officer or such other person as the Chief Executive Officer shall designate. The
Board of Directors and/or the Chief Executive Officer of the Company may change
Employee's title, position and/or duties at any time.
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees to
------------------------
devote his or her full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors and its Chief Executive Officer. Employee further
agrees, as a condition to the performance by the Company of each and all of its
obligations hereunder, that so long as Employee is employed by the Company or
otherwise receiving compensation or other consideration from the Company,
Employee will not directly or indirectly render services of any nature to,
otherwise become employed by, or otherwise participate or engage in any other
business without the Company's prior written consent. Employee further agrees
to execute such secrecy, non-disclosure, patent, trademark, copyright and other
proprietary rights agreements, if any, as the Company may from time to time
reasonably require. Nothing herein contained shall be deemed to preclude
Employee from having outside personal investments and involvement with
appropriate community activities, and from devoting a reasonable amount of time
to such matters, provided that this shall in no manner interfere with or
derogate from Employee's work for the Company.
4. COMPENSATION.
------------
(a) The Company agrees to pay Employee a base salary at the rate of
$450,000.00 per year. Employee's base salary shall be reviewed, and subject to
increase but
<PAGE>
not decrease at the Company's discretion, as of January 1, 2001.
(b) The Company shall provide Employee an opportunity to earn an annual
bonus based upon participation in the Company's Executive Bonus Plan as it may
or may not exist from time to time. Employee acknowledges that all bonuses are
discretionary, that the current Executive Bonus Plan does not include any
nondiscretionary bonus plan, and that the Company does not contemplate
establishing any nondiscretionary bonus plan applicable to Employee.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the compensation
---------------------------------
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall always be subject to the
control, supervision, and direction of the Company and its Chief Executive
Officer.
(b) Vacation. Employee shall receive four (4) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused vacation will be carried
forward from year to year. The maximum vacation time Employee may accrue shall
be three times Employee's annual vacation benefit. The Company reserves the
right to pay Employee for unused, accrued vacation benefits in lieu of providing
time off.
(c) Benefits. During Employee's employment with the Company pursuant to
--------
this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $1,000,000.00, provided that
Employee's physical condition does not prevent Employee from qualifying for such
insurance coverage under reasonable terms and conditions;
(iii) participate in the Company's 401(k) pension plan pursuant to
the terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time; and
(v) participate in any other benefit plans the Company provides
from
2
<PAGE>
time to time to senior executive officers. It is understood that benefit plans
within the meaning of this subsection do not include compensation or bonus
plans.
(d) Estate Planning and Other Perquisites. To the extent the Company
-------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other senior executive officers generally from time to
time, such services and perquisites shall be made available to Employee on the
same terms and conditions.
(e) Club Membership. The Company shall pay the reasonable cost of
---------------
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee.
(f) Signing Bonus. Company shall pay Employee a one-time signing
-------------
bonus of $200,000.00, which is to be paid to Employee on the date Employee
actually commences employment pursuant to this Agreement.
(g) Stock Options. Pursuant to a separate stock option agreement, and
-------------
subject to the approval of the Stock Option Committee of the Board of Directors,
the Company shall provide to Employee options to purchase up to 200,000 shares
of the Common Stock of the Company in accord with the following pricing and
vesting schedule ("Start Date" means the date on which Employee actually
commences employment with the Company):
SHARES VESTING DATE PRICE
------ ----------------- -----
50,000 December 31, 2000 Base Price (the closing price on the
NYSE on December 21, 1999, as reported in
the Wall Street Journal)
50,000 December 31, 2001 Base Price
50,000 December 31, 2002 Base Price
50,000 December 31, 2003 Base Price
All shares of stock that are issuable upon the exercise of such options granted
to Employee shall be registered as promptly as possible with the Securities and
Exchange Commission, and shall be approved for listing on the New York Stock
Exchange upon notice of issuance.
(h) Relocation Expenses. The Company will reimburse Employee for
-------------------
actual and reasonable expenses incurred in connection with the relocation of
Employee's principal residence to a location within San Diego County,
California, that is within thirty minutes normal driving time of the Company's
facilities at Carlsbad, California, including, but not limited to, the actual
and reasonable costs of moving household goods (both from his old residence to a
temporary residence and from the temporary residence to the new residence);
temporary housing costs; commission and closing costs associated with the sale
of Employee's old residence; carrying costs associated with the old residence,
including all expenses associated with maintaining Employee's old residence
until sold; and closing costs and commissions associated with the acquisition of
a new primary residence. To the extent any
3
<PAGE>
reimbursement of such expenses pursuant to this section is subject to state or
federal taxation imposed upon Employee, the Company shall pay to Employee an
additional amount (the "Gross-Up Payment") such that after payment of all state
and federal taxes on the reimbursement and the Gross-Up Payment, Employee shall
retain an amount equal to the reimbursement. Employee shall fully and completely
cooperate with the Company with respect to all matters associated with the
taxation or potential taxation of reimbursements made pursuant to this section.
Notwithstanding anything else to the contrary, total reimbursement and Gross-Up
Payments pursuant to this provision shall not exceed $150,000.00.
6. TAX INDEMNIFICATION. Employee shall be indemnified by the Company for
-------------------
certain excise tax obligations, as more specifically set forth in Exhibit A to
this Agreement.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that, while employed by the Company or otherwise receiving compensation
or other consideration from the Company, Employee will not, directly or
indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company
or any of its affiliates, or have any interest in any person, firm, corporation,
or venture which engages directly or indirectly in competition with the business
of the Company or any of its affiliates. For purposes of this section, the
ownership of interests in a broadly based mutual fund shall not constitute
ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of
---------------
his or her duties hereunder, Employee shall not cause or induce, or attempt to
cause or induce, any person now or hereafter employed by the Company or any of
its affiliates to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company or
any of its affiliates for a period of one (1) year from the date Employee ceases
to be employed by the Company.
(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Employee shall not cause or induce, or attempt to cause or induce,
any person or firm supplying goods, services or credit to the Company or any of
its affiliates to diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. While employed by the Company, Employee shall
--------------------
not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
(e) Non-Interference. While employed by the Company, and for one (1)
----------------
year thereafter, Employee shall not in any way undertake to harm, injure or
disparage the Company, its officers, directors, employees, agents, affiliates,
vendors, products, or customers, or their successors, or in any other way
exhibit an attitude of hostility toward them. Employee understands that it is
the policy of the Company that only the Chief Executive Officer, the Vice
President of Press, Public and Media Relations and their specific designees may
speak to the press or media about the Company or its business, and agrees not to
interfere
4
<PAGE>
with the Company's press and public relations by violating this policy.
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment
----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time. In the event of a termination by the Company for its convenience, Employee
shall be entitled to receive (i) any compensation accrued and unpaid as of the
date of termination; and (ii) the immediate vesting of all unvested stock
options held by Employee as of the date of such termination. In addition to the
foregoing, and subject to the provisions of Section 20, Employee shall be
entitled to Special Severance equal to (i) severance payments equal to
Employee's former base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to the greater of
the remainder of the term of this Agreement or twelve (12) months from the date
of termination; (ii) the payment of premiums owed for COBRA insurance benefits
for a period of time equal to twelve (12) months from the date of termination;
and (iii) no other severance.
(b) Termination by the Company for Substantial Cause. Employee's
------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by
Employee to substantially perform his or her duties, breach of this Agreement,
or misconduct, including but not limited to, dishonesty, theft, use or
possession of illegal drugs during work, and/or felony criminal conduct.
(c) Termination by Employee for Substantial Cause. Employee's
---------------------------------------------
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) the immediate vesting
of all unvested stock options held by Employee as of the date of such
termination. In addition to the foregoing, and subject to the provisions of
Section 20, Employee shall be entitled to Special Severance equal to (i)
severance payments equal to Employee's former base salary at the same rate and
on the same schedule as in effect at the time of termination for a period of
time equal to the greater of the remainder of the term of this Agreement or
twelve (12) months from the date of termination; (ii) the payment of premiums
owed for COBRA insurance benefits for a period of time equal to twelve (12)
months from the date of termination; and (iii) no other severance. "Substantial
cause" shall mean for purposes of this subsection a material breach of this
Agreement by the Company.
(d) Termination Due to Permanent Disability. Subject to all applicable
---------------------------------------
laws, Employee's employment under this Agreement may be terminated immediately
by the Company in the event Employee becomes permanently disabled. Permanent
disability shall be defined as Employee's failure to perform or being unable to
perform all or substantially all of Employee's duties under this Agreement for a
continuous period of more than six (6) months on account of any physical or
mental disability, either as mutually agreed to by the parties or as reflected
in the opinions of three qualified physicians, one of which has been selected by
the
5
<PAGE>
Company, one of which has been selected by Employee, and one of which has
been selected by the two other physicians jointly. In the event of a
termination by the Company due to Employee's permanent disability, Employee
shall be entitled to (i) any compensation accrued and unpaid as of the date of
termination; (ii) severance payments equal to Employee's former base salary at
the same rate and on the same schedule as in effect at the time of termination
for a period of time equal the greater of the remainder of the term of this
Agreement or twelve (12) months from the date of termination; (iii) the
immediate vesting of outstanding but unvested stock options held by Employee as
of such termination date in a prorated amount based upon the number of days in
the option vesting period that elapsed prior to Employee's termination; (iv) the
payment of premiums owed for COBRA insurance benefits for a period of time equal
to twelve (12) months from the date of termination; and (v) no other severance.
The Company shall be entitled to take, as an offset against any amounts due
pursuant to subsections (i) and (ii) above, any amounts received by Employee
pursuant to disability or other insurance, or similar sources, provided by the
Company.
(e) Termination Due to Death. Employee's employment under this
--------------------------
Agreement be terminated immediately by the Company in the event of Employee's
death. In the event of a termination due to Employee's death, Employee's estate
shall be entitled to (i) any compensation accrued and unpaid as of the date of
death; (ii) severance payments equal to Employee's former base salary at the
same rate and on the same schedule as in effect at the time of death for a
period of time equal to the greater of the remainder of the term of this
Agreement or six (6) months from the date of death; (iii) the immediate vesting
of outstanding but unvested stock options held by Employee as of the date of
death in a prorated amount based upon the number of days in the option vesting
period that elapsed prior to Employee's death; and (iv) no other severance.
(f) Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Employee shall not be entitled to any further compensation, bonus,
damages, restitution, relocation benefits, or other severance benefits upon
termination of employment. The amounts payable to Employee pursuant to this
Section 8 shall not be treated as damages, but as severance compensation to
which Employee is entitled by reason of termination of employment under the
applicable circumstances. The Company shall not be entitled to set off against
the amounts payable to Employee hereunder any amounts earned by Employee in
other employment after termination of his or her employment with the Company
pursuant to this Agreement, or any amounts which might have been earned by
Employee in other employment had Employee sought such other employment. The
provisions of this Section 8 shall not limit Employee's rights under or pursuant
to any other agreement or understanding with the Company regarding any pension,
profit sharing, insurance or other employee benefit plan of the Company to which
Employee is entitled pursuant to the terms of such plan.
(g) Termination By Mutual Agreement of the Parties. Employee's
----------------------------------------------
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
6
<PAGE>
(h) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Employee to vacate his or her office or otherwise remain off
the Company's premises and to cease any and all activities on the Company's
behalf without such action constituting a termination of employment or a breach
of this Agreement.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit B hereto) occurs before
the termination of Employee's employment hereunder, then this Agreement shall be
extended (the "Extended Employment Agreement") in the same form and substance as
in effect immediately prior to the Change in Control, except that the
termination date, as specified pursuant to Section 1 of this Agreement, shall be
three (3) years from the effective date of the Change in Control.
(b) Notwithstanding anything in this Agreement to the contrary, if upon or
at any time within one (1) year following any Change in Control that occurs
during the term of this Agreement there is a Termination Event (as defined
below), Employee shall be treated as if he or she had been terminated for the
convenience of the Company pursuant to Section 8(a), and Employee shall be
entitled to receive the same compensation and other benefits and entitlements as
are described in Section 8(a), as appropriate, of this Agreement. Furthermore,
the provisions of Section 8 shall continue to apply during the term of the
Extended Employment Agreement except that, in the event of a conflict between
Section 8 and the rights of Employee described in this Section 9, the provisions
of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any one or more of
the following, and in the absence of the Employee's permanent disability
(defined in Section 8(d)), Employee's death, and any of the factors enumerated
in Section 8(b) providing for termination by the Company for substantial cause:
(i) the termination or material breach of this Agreement by the
Company;
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position, duties,
responsibilities or status that Employee had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any of
the compensation, reimbursable expenses, stock options, incentive programs, or
other benefits or perquisites provided to Employee under the terms of this
Agreement or any other agreement or understanding between the Company and
Employee, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment to
7
<PAGE>
Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee understands and
-----------------------------------------
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Employee
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Employee make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the
Company's office except as specifically authorized by the Company. Employee
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Employee's employment with the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee of the
--------------------
Company within the meaning of all federal, state and local laws and regulations,
including, but not limited to, laws and regulations governing unemployment
insurance, workers' compensation, industrial accident, labor and taxes.
12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
------------------------------------------
(a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Employee or observed by Employee, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Employee develops during the Term of this Agreement in
connection with the work performed by Employee for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.
(b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or (iii) information which, subsequent to disclosure or
observation, is obtained by Employee from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Employee) and who is not required
to refrain from disclosing such information to others.
(c) While employed by the Company, Employee will have access to and
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become familiar with various Trade Secrets and Confidential Information.
Employee acknowledges that the Trade Secrets and Confidential Information are
owned and shall continue to be owned solely by the Company and/or its
affiliates. Employee agrees that Employee will not, at any time, whether during
or subsequent to Employee's employment by the Company and/or its affiliates, use
or disclose Trade Secrets and Confidential Information for any competitive
purpose or divulge the same to any person other than the Company or persons with
respect to whom the Company has given its written consent, unless Employee is
compelled to disclose it by governmental process. In the event Employee believes
that Employee is legally required to disclose any Trade Secrets or Confidential
Information, Employee shall give reasonable notice to the Company prior to
disclosing such information and shall assist the Company in taking such legally
permissible steps as are reasonable and necessary to protect the Trade Secrets
or Confidential Information, including, but not limited to, execution by the
receiving party of a non-disclosure agreement in a form acceptable to the
Company.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. ASSIGNMENT OF RIGHTS.
--------------------
(a) As used in this Agreement, "Designs, Inventions and Innovations,"
whether or not they have been patented, trademarked, or copyrighted, include,
but are not limited to designs, inventions, innovations, ideas, improvements,
processes, sources of and uses for materials, apparatus, plans, systems and
computer programs relating to the design, manufacture, use, marketing,
distribution and management of the Company's and/or its affiliates' products.
(b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Employee, alone
or with anyone else, in connection with the work performed by Employee for the
Company during Employee's employment with the Company, regardless of whether
they are suitable to be patented, trademarked and/or copyrighted.
(c) Employee agrees to disclose in writing to the President and CEO of
the Company any Design, Invention or Innovation relating to the business of the
Company and/or its affiliates, which Employee develops, conceives and/or reduces
to practice in connection with any work performed by Employee for the Company,
either alone or with anyone else, while employed by the Company and/or within
twelve (12) months of the termination of employment. Employee shall disclose all
Designs, Inventions and Innovations to the Company, even if Employee does not
believe that he or she is required under this Agreement, or pursuant to
California Labor Code Section 2870, to assign his or her interest in such
Design, Invention or Innovation to the Company. If the Company and Employee
disagree as to whether or not a Design, Invention or Innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
(d) Pursuant to California Labor Code Section 2870, the obligation to
assign
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as provided in this Agreement does not apply to any Design, Invention or
Innovation to the extent such obligation would conflict with any state or
federal law. The obligation to assign as provided in this Agreement does not
apply to any Design, Invention or Innovation that Employee developed entirely on
Employee's own time without using the Company's equipment, supplies, facilities
or Trade Secrets and Confidential Information except those Designs, Inventions
or Innovations that either:
(i) Relate at the time of conception or reduction to practice to
the Company's and/or its affiliates' business, or actual or demonstrably
anticipated research of the Company and/or its affiliates; or
(ii) Result from any work performed by Employee for the Company
and/or its affiliates.
(e) Employee agrees that any Design, Invention and/or Innovation
which is required under the provisions of this Agreement to be assigned to the
Company shall be the sole and exclusive property of the Company. Upon the
Company 's request, at no expense to Employee, Employee shall execute any and
all proper applications for patents, copyrights and/or trademarks, assignments
to the Company, and all other applicable documents, and will give testimony when
and where requested to perfect the title and/or patents (both within and without
the United States) in all Designs, Inventions and Innovations belonging to the
Company.
(f) The provisions of this Section 13 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
----------
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall have no right to assign his rights, benefits, duties, obligations
or other interests in this Agreement, it being understood that this Agreement is
personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
-------------------------
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding as provided in Section 18(f).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Employee and the Company
regarding employment.
17. NOTICES. Any notice, request, demand, or other communication required
-------
or permitted hereunder, shall be deemed properly given when actually received or
within five (5)
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days of mailing by certified or registered mail, postage prepaid, to:
Employee: Mick McCormick
14328 SW Mistletoe Drive
Tigard, Oregon 97223
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Steven C. McCracken
Executive Vice President, Chief Legal Officer
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. IRREVOCABLE ARBITRATION OF DISPUTES.
-----------------------------------
(a) Employee and the Company agree that any dispute, controversy or
claim arising hereunder or in any way related to this Agreement, its
interpretation, enforceability, or applicability, or relating to Employee's
employment, or the termination thereof, that cannot be resolved by mutual
agreement of the parties shall be submitted to binding arbitration. This
includes, but is not limited to, alleged violations of federal, state and/or
local statutes, claims based on any purported breach of duty arising in contract
or tort, including breach of contract, breach of the covenant of good faith and
fair dealing, violation of public policy, violation of any statutory,
contractual or common law rights, but excluding workers' compensation,
unemployment matters, or any matter falling within the jurisdiction of the state
Labor Commissioner. The parties agree that arbitration is the parties' only
recourse for such claims and hereby waive the right to pursue such claims in any
other forum, unless otherwise provided by law. Any court action involving a
dispute which is not subject to arbitration shall be stayed pending arbitration
of arbitrable disputes; provided, however, that the parties shall have the right
to seek provisional relief in an ancillary court action in connection with an
arbitrable dispute.
(b) Any demand for arbitration shall be in writing and must be
communicated to the other party within one (1) year after the discovery of the
alleged claim or cause of action by the aggrieved party, or, if later, within
the time period stated in the applicable statute of limitations.
(c) The arbitration shall be conducted pursuant to the procedural
rules stated in the National Rules for Resolution of Employment Disputes of the
American Arbitration Association ("AAA"). The arbitration shall be conducted in
San Diego by a former or retired judge or attorney with at least 10 years
experience in employment-related disputes, or a non-attorney with like
experience in the area of dispute, who shall have the power to hear motions,
control discovery, conduct hearings and otherwise do all that is necessary to
resolve the matter. The parties must mutually agree on the arbitrator. If the
parties cannot agree on the arbitrator after their best efforts, an arbitrator
from the
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American Arbitration Association will be selected pursuant to the American
Arbitration Association National Rules for Resolution of Employment Disputes.
(d) The arbitration award shall be final and binding, and may be
entered as a judgment in any court having competent jurisdiction. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute. However, at a minimum, each party will be
entitled to one deposition.
(e) The parties understand and agree that the arbitrator has no
authority to award punitive damages.
(f) The prevailing party shall be entitled to an award by the
arbitrator of reasonable attorneys' fees and other costs reasonably incurred in
connection with the arbitration, including witness fees and expert witness fees,
unless the arbitrator for good cause determines otherwise.
(g) The provisions of this Section shall survive the expiration or
termination of the Agreement, and shall be binding upon the parties.
THE PARTIES HAVE READ PARAGRAPH 18 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE.
______ (Employee) ______ (Company)
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of
--------
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
(b) Waiver. Failure of either party at any time to require performance
------
by the other of any provision of this Agreement shall in no way affect that
party's rights thereafter to enforce the same, nor shall the waiver by either
party of any breach of any provision hereof be held to be a waiver of any
succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under
--------------
the internal laws of the State of California and shall be governed and construed
in accordance with the laws of said state as to both interpretation and
performance.
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(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
(e) Advertising Waiver. Employee agrees to permit the Company and/or
------------------
its affiliates, and persons or other organizations authorized by the Company
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of the Company and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Employee's name and/or pictures of Employee taken in the course of
Employee's provision of services to the Company and/or its affiliates, appear.
Employee hereby waives and releases any claim or right Employee may otherwise
have arising out of such use, publication or distribution.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to the
-------------------------------
contrary, it is expressly understood that any obligation of the Company to pay
Special Severance pursuant to this Agreement shall be subject to:
(a) Employee's continued compliance with the terms and conditions of
Sections 7(a), 7(b), 7(c), 7(e), 12, 13 and 18;
(b) Employee must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in
a broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and
(c) Employee must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.
21. TRADE SECRETS OF OTHERS. It is the understanding of both the Company
-----------------------
and Employee that Employee shall not divulge to the Company any confidential
information or trade secrets belonging to others, including Employee's former
employers, nor shall the Company seek to elicit from Employee any such
information. Consistent with the foregoing, Employee shall not provide to the
Company, and the Company shall not request, any documents or copies of documents
containing such information.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Mick McCormick By: /s/ Ely Callaway
- ---------------------------- -------------------------------
Mick McCormick Ely Callaway, Chairman and CEO
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EXHIBIT A
TAX INDEMNIFICATION
Pursuant to Section 6 of Employee's Employment Agreement ("Section 6"), the
Company agrees to indemnify Employee with respect to certain excise tax
obligations as follows:
1. Definitions. For purposes of Section 6 and this Exhibit A, the
following terms shall have the meanings specified herein:
(a) "Claim" shall mean any written claim (whether in the form of a tax
assessment, proposed tax deficiency or similar written notification) by the
Internal Revenue Service or any state or local tax authority that, if
successful, would result in any Excise Tax or an Underpayment.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
All references herein to any section, subsection or other provision of the Code
shall be deemed to refer to any successor thereto.
(c) "Excise Tax" shall mean (i) any excise tax imposed by Section 4999
of the Code or any comparable federal, state or local tax, and (ii) any interest
and/or penalties incurred with respect to any tax described in 1(c)(i).
(d) Gross-Up Payment shall mean a cash payment as specified in Section
2.
(e) "Overpayment" and "Underpayment" shall have the meanings specified
in Section 4.
(f) "Payment" shall mean any payment, benefit or distribution
(including, without limitation, cash, the acceleration of the granting, vesting
or exercisability of stock options or other incentive awards, or the accrual or
continuation of any other payments or benefits) granted or paid to or for the
benefit of Employee by the Company or by any person or persons whose actions
result in a Taxable Event (as defined in this Section), or by any person
affiliated with the Company or such person(s), whether paid or payable pursuant
to the terms of this Agreement or otherwise. Notwithstanding the foregoing, a
Payment shall not include any Gross-Up Payment required under Section 6 and this
Exhibit A
(g) "Taxable Event" shall mean any change in control or other event
which triggers the imposition of any Excise Tax on any Payment.
2. In the event that any Payment is determined to be subject to any Excise
Tax, then Employee shall be entitled to receive from the Company a Gross-Up
Payment in an amount such that, after the payment of all income taxes, Excise
Taxes and any other taxes imposed with respect to the Gross-Up Payment (together
with payment of all interest and penalties imposed with respect to any such
taxes), Employee shall retain a net amount of the Gross-Up Payment equal to the
Excise Tax imposed with respect to the Payments.
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<PAGE>
3. All determinations required to be made under Section 6 and this Exhibit
A, including, without limitation, whether and when a Gross-Up Payment is
required and the amount of such Gross-Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by the accounting
firm of Pricewaterhouse Coopers LLP or, if applicable, its successor as the
Company's independent auditor (the "Accounting Firm"). In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Taxable Event to which a possible Gross-Up Payment is
related, another nationally recognized accounting firm that is mutually
acceptable to the Company and Employee shall be appointed to make the
determinations required hereunder (which accounting firm shall then be referred
to as the Accounting Firm hereunder). The Accounting Firm shall provide
detailed supporting calculations to the Company and to Employee regarding the
amount of Excise Tax (if any) which is payable, and the Gross-Up Payment (if
any) required hereunder, with respect to any Payment or Payments, with such
calculations to be provided at such time as may be requested by the Company but
in no event later than fifteen (15) business days following receipt of a written
notice from Employee that there has been a Payment that may be subject to an
Excise Tax. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment as determined pursuant to Section 6 and
this Exhibit A shall be paid by the Company to Employee within five (5) business
days after receipt of the Accounting Firm's determination. If the Accounting
Firm determines that no Excise Tax is payable by Employee, the Accounting Firm
shall furnish Employee with a written opinion that failure to disclose, report
or pay the Excise Tax on Employee's federal or other applicable tax returns will
not result in the imposition of a negligence penalty, understatement penalty or
other similar penalty. All determinations by the Accounting Firm shall be
binding upon the Company and Employee in the absence of clear and indisputable
mathematical error. Following receipt of a Gross-Up Payment as provided herein,
Employee shall be obligated to properly and timely report his Excise Tax
liability on the applicable tax returns or reports and to pay the full amount of
Excise Tax with funds provided through such Gross-Up Payment. Notwithstanding
the foregoing, if the Company reasonably determines that the Employee will be
unable or otherwise may fail to make such Excise Tax payment, the Company may
elect to pay the Excise Tax to the Internal Revenue Service and/or other
applicable tax authority on behalf of the Employee, in which case the Company
shall pay the net balance of the Gross-Up Payment (after deduction of such
Excess Tax payment) to the Employee.
4. As a result of uncertainty in the application of Section 4999 of the
Code, it is possible that a Gross-Up Payment will not have been made by the
Company that should have been made (an "Underpayment") or that a Gross-Up
Payment is made that should not have been made (an "Overpayment"). In the event
that Employee is required to make a payment of any Excise Tax, due to an
Underpayment, the Accounting Firm shall determine the amount of Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to Employee in which case Employee shall be obligated to make a timely
payment of the full amount of the applicable Excise Tax to the applicable tax
authority, provided, however, the Company may elect to pay the Excise Tax to the
applicable tax authority on behalf of Employee consistent with the provisions of
Section 3, in which case the Company shall pay the net balance of the
Underpayment (after deduction of such Excise Tax payment) to Employee. In the
event that the Accounting Firm determines that an Overpayment has been made, any
such Overpayment shall be repaid by Employee to the Company within ninety
16
<PAGE>
(90) days after written demand to Employee by the Company, provided, however,
that Employee shall have no obligation to repay any amount of the Overpayment
that has been paid to, and not recovered from, a tax authority, provided
further, however, in such event the Company may direct Employee to prosecute a
claim for a refund of such amount consistent with the principles set forth in
Section 5.
5. Employee shall notify the Company in writing of any Claim. Such notice
(a) shall be given as soon as practicable, but in no event later than fifteen
(15) business days, following Employee's receipt of written notice of the Claim
from the applicable tax authority, and (b) shall include a compete and accurate
copy of the tax authority's written Claim or otherwise fully inform the Company
of the nature of the Claim and the date on which any payment of the Claim must
be paid, provided that Employee shall not be required to give notice to the
Company of facts of which the Company is already aware, and provided further
that failure or delay by Employee to give such notice shall not constitute a
breach of Section 6 or this Exhibit A except to the extent that the Company is
prejudiced thereby. Employee shall not pay any portion of a Claim prior to the
earlier of (a) the expiration of thirty (30) days following the date on which
Employee gives the foregoing notice to the Company, (b) the date that any Excise
Tax payment under the Claim is due, or (c) the date the Company notifies
Employee that it does not intend to contest the Claim. If, prior to expiration
of such period, the Company notifies Employee in writing that it desires to
contest the Claim, Employee shall:
(a) give the Company any information reasonably requested by the
Company relating to the Claim;
(b) take such action in connection with contesting the Claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to the Claim by
an attorney selected and compensated by the Company who is reasonably acceptable
to Employee;
(c) cooperate with the Company in good faith in order to effectively
contest the Claim; and
(d) permit the Company to participate (at its expense) in any and all
proceedings and conferences pertaining to the Claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including, without limitation, additional interest and penalties and
attorneys' fees) incurred in connection with any such contest, and shall
indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax
or income tax (including, without limitation, interest and penalties with
respect thereto) and all costs imposed or incurred in connection with such
contests. Without limitation upon the foregoing provisions of this Section 5,
and except as provided below, the Company shall control all proceedings
concerning any such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with tax
authorities pertaining to the Claim. At the written request of the Company, and
upon payment to Employee of an amount at least equal to the Claim plus any
additional amount necessary to obtain the jurisdiction of the appropriate
tribunal and/or court, Employee shall pay the same and sue for a refund or
otherwise contest the Claim in any
17
<PAGE>
permissible manner as directed by the Company. Employee agrees to prosecute any
contest of a Claim to a determination before any administrative tribunal, in a
court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine, provided, however, that if the Company requests
Employee to pay the Claim and sue for a refund, the Company shall indemnify and
hold Employee harmless, on an after-tax basis, from any Excise Tax or income tax
(including, without limitation, interest and penalties with respect thereto) and
costs imposed or incurred in connection with such contest or with respect to any
imputed income attributable to any advances or payments by the Company
hereunder. Any extension of the statute of limitations relating to assessment of
any Excise Tax for the taxable year of Employee which is the subject of a Claim
is to be limited solely to the Claim. Furthermore, the Company's control of a
contest as provided hereunder shall be limited to issues for which a Gross-Up
Payment would be payable hereunder, and Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other tax authority.
6. If Employee receives a refund from a tax authority of all or any
portion of an Excise Tax paid by or on behalf of Employee with amounts advanced
by the Company pursuant to Section 6 and this Exhibit A, Employee shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). Employee shall, if so
directed by the Company, file and otherwise prosecute a claim for refund of any
Excise Tax payment made by or on behalf of Employee with amounts advanced by the
Company pursuant to Section 6 and this Exhibit A, with any such refund claim to
be effected in accordance with the principles set forth in Section 5. If a
determination is made that Employee shall not be entitled to any refund and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of thirty (30) days after such determination,
then Employee shall have no further obligation hereunder to contest such denial
or to repay to the Company the amount involved in such unsuccessful refund
claim. The amount of any advances which are made by the Company in connection
with any such refund claim hereunder, to the extent not refunded by the
applicable tax authority to Employee, shall offset, as appropriate consistent
with the purposes of Section 6 and this Exhibit A, the amount of any Gross-Up
Payment required hereunder to be paid by the Company to Employee.
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EXHIBIT B
CHANGE IN CONTROL
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
1. Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its affiliates and any employee benefit or stock ownership plan
of the Company or its affiliates and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
2. Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
3. Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(a) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity, more than 50% of the
combined voting power of the voting securities of the Company or such other
entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or
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(b) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
4. Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of January 1,
2000, by and between CALLAWAY GOLF COMPANY, a Delaware corporation (the
"Company"), and BRUCE PARKER ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby accepts
employment pursuant to the terms and provisions of this Agreement for the period
commencing January 1, 2000 and terminating December 31, 2003, unless this
Agreement is earlier terminated as hereinafter provided. It is agreed and
understood that Employee's employment is for a defined and limited term, as set
forth in this Agreement, and that unless such employment is earlier terminated,
upon the expiration of this Agreement Employee shall cease to be an employee of
the Company.
2. SERVICES.
(a) Employee shall serve as Ambassador. Employee's duties shall be
those assigned to him from time to time by the President of the Company, and are
expected to involve contact with, and advice concerning, the customers of the
Company. Employee shall report to the President of the Company or to such other
senior executive as the Chief Executive Officer shall designate.
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE NON-EXCLUSIVE. During the term hereof, Employee agrees
to devote his or her best efforts to the performance of Employee's duties
hereunder pursuant to the supervision and direction of the Company's Board of
Directors and its Chief Executive Officer. Employee further agrees, as a
condition to the performance by the Company of each and all of its obligations
hereunder, that so long as Employee is employed by the Company or otherwise
receiving compensation or other consideration from the Company, Employee will
not directly or indirectly render services of any nature to, otherwise become
employed by, or otherwise participate or engage in any other business that
competes with the Company or any of its affiliates without the Company's prior
written consent. Employee further agrees to execute such secrecy, non-
disclosure, patent, trademark, copyright and other proprietary rights
agreements, if any, as the Company may from time to time reasonably require.
Nothing herein contained shall be deemed to preclude Employee from providing
services to non-competing entities, consistent with the above, or from having
outside personal investments and involvement with appropriate community
activities, and from devoting a reasonable amount of time to such matters,
provided that such activities shall in no manner interfere with or derogate from
Employee's work for the Company. If Employee undertakes to provides services to
non-competing entities during the term of this Agreement, Employee shall notify
the Company, in writing, within thirty (30) days.
<PAGE>
4. COMPENSATION.
(a) The Company agrees to pay Employee a Base Salary at the rate of
$400,000.00 per year for calendar years 2000 and 2001, and at the rate of
$300,000.00 per year for calendar years 2002 and 2003. Base Salary shall be
payable monthly.
(b) The Company agrees to pay Employee Supplemental Compensation at the
rate of $5,000.00 per day for each day Employee performs services for the
Company at the Company's request "In Service Days"). Supplemental Compensation
shall be paid monthly, with any Base Salary due, in the next month following the
month in which it is earned. It is agreed and understood that the Company shall
request, and Employee shall provide, a minimum of 120 In Service Days worth
$600,000.00 in Supplemental Compensation during the term of this Agreement (the
"Total In Service Commitment"). If, through no fault of Employee, the Company
fails to use and compensate Employee for at least 30 In Service Days in any
calendar year during the term of this Agreement, then on or before December 31
of that calendar year the Company shall pay to Employee a lump sum cash payment
equal to the difference between the total Supplemental Compensation paid in that
year and the lesser of (i) any remaining and unpaid portion of the Total In
Service Commitment and (ii) $150,000. Employee shall provide such records and
documentation, including trip reports, as the Company may reasonably request as
a condition of receiving Supplemental Compensation. Travel days shall not count
as In Service Days, and shall not earn Supplemental Compensation, except that
any day on which Employee is required by the Company to travel more than four
(4) hours in connection with the performance of his requested duties, and on
which no other services are provided by Employee, shall be treated as one half
of an In Service Day and shall earn Supplemental Compensation of $2,500.00 for
each such day.
(c) The Company shall provide Employee an opportunity to receive an
annual bonus based purely upon the Company's discretion, and without regard to
any bonus or bonuses paid by the Company to any other employee or employees.
Employee acknowledges that all bonuses are discretionary, that he or she has no
expectation of any nondiscretionary bonus, and that the Company does not
contemplate establishing any nondiscretionary bonus plan applicable to Employee.
(d) All payments to Employee from the Company or subject to applicable
state, federal and other tax laws, including any applicable withholding
provisions.
5. EXPENSES AND BENEFITS.
(a) Reasonable and Necessary Expenses. In addition to the compensation
provided for in Section 4 hereof, the Company shall reimburse Employee for all
reasonable, customary, and necessary expenses incurred in the performance of
Employee's duties hereunder. Employee shall first account for such expenses by
submitting a signed statement itemizing such expenses prepared in accordance
with the policy set by the Company for reimbursement of such expenses. The
amount, nature, and extent of such expenses shall always be subject to the
control, supervision, and direction of the Company and its Chief Executive
Officer. It is agreed and understood that, wherever practical and reasonable,
Employee's air travel in the United States shall be by chartered aircraft,7 and
that Employee's
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air travel in the United States where chartered aircraft is not practical and
reasonable, and on all international trips, shall be First Class where such
service is available. Hotel and other travel accommodations shall be of a class
of service mutually agreed upon by the Company and Employee.
(b) Vacation. Employee shall not be entitled to receive any paid
vacation or similar vacation benefits during the term of this Agreement. The
Company agrees to pay Employee, in lieu of providing time off, for any vacation
benefits accrued prior to January 1, 2000, on or before January 31, 2000.
(c) Benefits. During Employee's employment with the Company pursuant to
this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $550,000.00, provided that
Employee's physical condition does not prevent Employee from qualifying for such
insurance coverage under reasonable terms and conditions;
(iii) participate in the Company's 401(k) pension plan pursuant to
the terms of the plan, as the same may be modified from time to time; and
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time.
(d) Support. The Company shall make available to Employee for business
use office space and secretarial services at the Company's principal place of
business in Carlsbad, California, and shall provide, at the Company's expense,
for Employee to have the use of a computer, fax and telephone for business use
at his home.
(e) Stock Options. Pursuant to a separate stock option agreement and
subject to the approval of the Stock Option Committee of the Board of Directors
or its authorized representatives, the Company shall provide to Employee options
to purchase up to 100,000 shares of the Common Stock of the Company in accord
with the following pricing and vesting schedule ("Grant Date" means the date on
which the options are officially granted by action of the Company):
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<TABLE>
<CAPTION>
SHARES VESTING DATE PRICE
- ------ ----------------- --------------------------------------
<S> <C> <C>
20,000 December 31, 2000 Base Price (the closing price
on the NYSE on Grant Date, as
reported in the Wall Street Journal)
20,000 December 31, 2001 Base Price
20,000 December 31, 2002 Base Price
40,000 December 31, 2003 Base Price
</TABLE>
All shares of stock that are issuable upon the exercise of such options granted
to Employee shall be registered as promptly as possible with the Securities and
Exchange Commission, and shall be approved for listing on the New York Stock
Exchange upon notice of issuance. This grant of stock options shall be made at
the Company's discretion by no later than March 31, 2000. If the options are not
granted on or before March 31, 2000, then Employee shall have until April 10,
2000 to give written notice of his intention to rescind this Agreement.
(f) Medical Consulting. To the extent the Company makes the services
of. Joseph A. Capozzi, M.D., F.A.C.S., available to senior officers of the
Company, the Company shall also undertake, if Dr. Capozzi agrees, to make such
services available to Employee on the same terms and conditions.
6. REQUIRED USE OF COMPANY EQUIPMENT.
(a) It is expected and required that, during the term of this
Agreement, Employee shall promote Callaway Golf(R) golf clubs by using the
Company's current products whenever he plays golf. The Company shall provide
Employee with up to two sets of the current products of the Company, at no cost
to Employee, for his personal use ("Personal Use Sets"). Personal Use Sets may
be exchanged, in whole or in part, for more current product as reasonably
required. Personal Use Sets may not be sold or given to others by Employee.
(b) In addition to any Personal Use Sets, Employee may purchase
additional equipment from the Company for his personal use or to be used as
gifts. Employee may purchase up to one set of golf clubs, including a bag, each
year at half of the published U.S. wholesale price. Additional clubs and/or bags
may be purchased at the published U.S. wholesale price, up to a maximum of
$10,000.00 in purchases in any one year. No equipment purchased under this
policy may be resold or used for barter.
(c) When the Company launches its golf ball, it will be expected and
required that, during the term of this Agreement, Employee shall promote the
Callaway Golf golf ball by using a current model golf ball whenever he plays
golf. The Company and Employee shall agree upon a program for providing Employee
with Callaway Golf golf balls for his personal use ("Personal Use Balls").
(d) The availability of Personal Use Sets and Personal Use Balls for
Employee shall be subject to the commercial and business needs of the Company,
including the needs of its sales departments. The Company, at its option, may
provide "demo", blemished,
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<PAGE>
or refurbished product. At the end of this Agreement, any remaining Personal Use
Sets or Personal Use Balls shall be returned to the Company.
7. NONCOMPETITION.
(a) Other Business. To the fullest extent permitted by law, Employee
agrees that, while employed by the Company or otherwise receiving compensation
or other consideration from the Company (including any Special Severance),
Employee will not, directly or indirectly (whether as agent, consultant, holder
of a beneficial interest, creditor, or in any other capacity), engage in any
business or venture which engages directly or indirectly in competition with the
business of the Company or any of its affiliates, or have any interest in any
person, firm, corporation, or venture which engages directly or indirectly in
competition with the business of the Company or any of its affiliates. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund.
(b) Other Employees. Except as may be required in the performance of his
or her duties hereunder, Employee shall not cause or induce, or attempt to cause
or induce, any person now or hereafter employed by the Company or any of its
affiliates to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company or
any of its affiliates for a period of one (1) year from the date Employee ceases
to be employed by the Company.
(c) Suppliers. While employed by the Company or otherwise receiving
compensation or other consideration from the Company (including any Special
Severance), and for one (1) year thereafter, Employee shall not cause or induce,
or attempt to cause or induce, any person or firm supplying goods, services or
credit to the Company or any of its affiliates to diminish or cease furnishing
such goods, services or credit.
(d) Conflict of Interest. Employee shall not engage in any conduct or
enterprise that shall constitute an actual or apparent conflict of interest with
respect to Employee's duties and obligations to the Company.
(e) Non-Interference. While employed by the Company or otherwise
receiving compensation or other consideration from the Company (including any
Special Severance), and for one (1) year thereafter, Employee shall not in any
way undertake to harm, injure or disparage the Company, its officers, directors,
employees, agents, affiliates, vendors, products, or customers, or their
successors, or in any other way exhibit an attitude of hostility toward them.
Employee understands that it is the policy of the Company that only the Chief
Executive Officer, the Vice President of Press, Public and Media Relations and
their specific designees may speak to the press or media about the Company or
its business, and agrees not to interfere with the Company's press and public
relations by violating this policy.
8. TERMINATION.
(a) Termination by the Company for Substantial Cause. Employee's
employment under this Agreement may be terminated immediately by the Company for
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<PAGE>
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.
"Substantial cause" shall mean for purposes of this subsection failure by
Employee to substantially perform his or her duties, breach of this Agreement,
or misconduct, including but not limited to, dishonesty, theft, use or
possession of illegal drugs during work, and/or felony criminal conduct.
Notwithstanding the foregoing, if the Company elects, in its sole discretion, it
may pay Employee additional severance equal to Employee's Base Salary at the
same rate and on the same schedule as in effect at the time of termination for a
period of time no longer than the remainder of the term of this Agreement. If
the Company so elects to pay Special Severance, then Employee shall remain
obligated to the Company pursuant to Sections 3, 7, 10, 12, 13, 15, 18, 19, 20
and 21 for the duration of such payments.
(b) Termination by Employee for Substantial Cause. Employee's employment
under this Agreement may be terminated immediately by Employee for substantial
cause at any time. In the event of a termination by Employee for substantial
cause, Employee shall be entitled to receive (i) any compensation accrued and
unpaid as of the date of termination; and (ii) the immediate vesting of all
unvested stock options held by Employee that would have vested had Employee
remained employed pursuant to this Agreement for a period of time equal to the
remainder of the term of this Agreement. In addition to the foregoing, and
subject to the provisions of Section 20, Employee shall be entitled to Special
Severance equal to (i) severance payments equal to Employee's former Base Salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the remainder of the term of this
Agreement; (ii) the payment of premiums owed for COBRA insurance benefits for a
period of time equal to the lesser of the remainder of the term of this
Agreement or the maximum time allowable under COBRA (currently eighteen (18)
months); (iii) a lump sum payment equal to the difference between the total
Supplemental Compensation paid Employee pursuant to this Agreement and
$600,000.00; and (iv) no other severance. "Substantial cause" shall mean for
purposes of this subsection a material breach of this Agreement by the Company.
(c) Termination Due to Permanent Disability. Subject to all applicable
laws, Employee's employment under this Agreement may be terminated immediately
by the Company in the event Employee becomes permanently disabled. Permanent
disability shall be defined as Employee's failure to perform or being unable to
perform all or substantially all of Employee's duties under this Agreement for a
continuous period of more than six (6) months on account of any physical or
mental disability, either as mutually agreed to by the parties or as reflected
in the opinions of three qualified physicians, one of which has been selected by
the Company, one of which has been selected by Employee, and one of which has
been selected by the two other physicians jointly. In the event of a termination
by the Company due to Employee's permanent disability, Employee shall be
entitled to (i) any compensation accrued and unpaid as of the date of
termination; (ii) severance payments equal to Employee's Base Salary at the same
rate and on the same schedule as in effect at the time of termination for a
period of time equal to the lesser of the remainder of the term of this
Agreement or six (6) months from the date of termination; (iii) the immediate
vesting of outstanding but unvested stock options held by Employee as of such
termination date in a prorated amount based upon the number of days in the
option vesting period that elapsed prior to Employee's termination;
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<PAGE>
(iv) the payment of premiums owed for COBRA insurance benefits for a period of
time equal to the lesser of the remainder of the term of this Agreement or the
maximum time allowable under COBRA (currently eighteen (18) months); and (vi) no
other severance. The Company shall be entitled to take, as an offset against any
amounts due pursuant to subsections (i) and (ii) above, any amounts received by
Employee pursuant to disability or other insurance, or similar sources, provided
by the Company.
(d) Termination Due to Death. Employee's employment under this
Agreement shall be terminated immediately by the Company in the event of
Employee's death. In the event of a termination due to Employee's death,
Employee's estate shall be entitled to (i) any compensation accrued and unpaid
as of the date of death; (ii) severance payments equal to Employee's Base Salary
at the same rate and on the same schedule as in effect at the time of death for
a period of time equal to the lesser of the remainder of the term of this
Agreement or six (6) months from the date of death; (iii) the immediate vesting
of outstanding but unvested stock options held by Employee as of the date of
death in a prorated amount based upon the number of days in the option vesting
period that elapsed prior to Employee's death; and (iv) no other severance.
(e) Termination at End of Term. Upon the expiration of this Agreement
at the end of its term on December 31, 2003, Employee shall cease to be employed
by the Company in any capacity. There shall be no severance or other payment due
Employee at such time, except that Employee shall be paid any accrued an unpaid
amounts otherwise due under this Agreement for Base Salary, Supplemental
Compensation, and/or reimbursable expenses.
(f) Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Employee shall not be entitled to any further compensation, bonus,
damages, restitution, relocation benefits, or other severance benefits upon
termination of employment. The amounts payable to Employee pursuant to this
Section 8 shall not be treated as damages, but as severance compensation to
which Employee is entitled by reason of termination of employment under the
applicable circumstances. The Company shall not be entitled to set off against
the amounts payable to Employee hereunder any amounts earned by Employee in
other employment after termination of his or her employment with the Company
pursuant to this Agreement, or any amounts which might have been earned by
Employee in other employment had Employee sought such other employment. The
provisions of this Section 8 shall not limit Employee's rights under or pursuant
to any other agreement or understanding with the Company regarding any pension,
profit sharing, insurance or other employee benefit plan of the Company to which
Employee is entitled pursuant to the terms of such plan.
(g) Termination By Mutual Agreement of the Parties. Employee's
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
9. PRE-TERMINATION RIGHTS. The Company shall have the right, at its
7
<PAGE>
option, to require Employee to vacate his or her office or otherwise remain off
the Company's premises and to cease any and all activities on the Company's
behalf without such action constituting a termination of employment or a breach
of this Agreement.
10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee understands and
agrees that all equipment, books, records, customer lists and documents
connected with the business of the Company and/or its affiliates are the
property of and belong to the Company. Under no circumstances shall Employee
remove from the Company's facilities any of the Company's and/or its affiliates'
equipment, books, records, documents, lists or any copies of the same without
the Company's permission, nor shall Employee make any copies of the Company's
and/or its affiliates' books, records, documents or lists for use outside the
Company's office except as specifically authorized by the Company. Employee
shall return to the Company and/or its affiliates all equipment, books, records,
documents and customer lists belonging to the Company and/or its affiliates upon
termination of Employee's employment with the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee of the
Company within the meaning of all federal, state and local laws and regulations,
including, but not limited to, laws and regulations governing unemployment
insurance, workers' compensation, industrial accident, labor and taxes.
12. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
(a) As used in this Agreement, the term "Trade Secrets and
Confidential Information" means information, whether written or oral, not
generally available to the public, regardless of whether it is suitable to be
patented, copyrighted and/or trademarked, which is received from the Company
and/or its affiliates, either directly or indirectly, including but not limited
to (i) concepts, ideas, plans and strategies involved in the Company's and/or
its affiliates' products, (ii) the processes, formulae and techniques disclosed
by the Company and/or its affiliates to Employee or observed by Employee, (iii)
the designs, inventions and innovations and related plans, strategies and
applications which Employee develops during the Term of this Agreement in
connection with the work performed by Employee for the Company and/or its
affiliates; and (iv) third party information which the Company and/or its
affiliates has/have agreed to keep confidential.
(b) Notwithstanding the provisions of subsection 12(a), the term
"Trade Secrets and Confidential Information" does not include (i) information
which, at the time of disclosure or observation, had been previously published
or otherwise publicly disclosed; (ii) information which is published (or
otherwise publicly disclosed) after disclosure or observation, unless such
publication is a breach of this Agreement or is otherwise a violation of
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or (iii) information which, subsequent to disclosure or
observation, is obtained by Employee from a third person who is lawfully in
possession of such information (which information is not acquired in violation
of any contractual, legal, or fiduciary obligation owed to the Company with
respect to such information, and is known by Employee) and who is not required
to refrain from disclosing such information to others.
8
<PAGE>
(c) While employed by the Company, Employee will have access to and
become familiar with various Trade Secrets and Confidential Information.
Employee acknowledges that the Trade Secrets and Confidential Information are
owned and shall continue to be owned solely by the Company and/or its
affiliates. Employee agrees that Employee will not, at any time, whether during
or subsequent to Employee's employment by the Company and/or its affiliates, use
or disclose Trade Secrets and Confidential Information for any competitive
purpose or divulge the same to any person other than the Company or persons with
respect to whom the Company has given its written consent, unless Employee is
compelled to disclose it by governmental process. In the event Employee believes
that Employee is legally required to disclose any Trade Secrets or Confidential
Information, Employee shall give reasonable notice to the Company prior to
disclosing such information and shall assist the Company in taking such legally
permissible steps as are reasonable and necessary to protect the Trade Secrets
or Confidential Information, including, but not limited to, execution by the
receiving party of a non-disclosure agreement in a form acceptable to the
Company.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. ASSIGNMENT OF RIGHTS.
(a) As used in this Agreement, "Designs, Inventions and Innovations,"
whether or not they have been patented, trademarked, or copyrighted, include,
but are not limited to designs, inventions, innovations, ideas, improvements,
processes, sources of and uses for materials, apparatus, plans, systems and
computer programs relating to the design, manufacture, use, marketing,
distribution and management of the Company's and/or its affiliates' products.
(b) As a material part of the terms and understandings of this
Agreement, Employee agrees to assign to the Company all Designs, Inventions and
Innovations developed, conceived and/or reduced to practice by Employee, alone
or with anyone else, in connection with the work performed by Employee for the
Company during Employee's employment with the Company, regardless of whether
they are suitable to be patented, trademarked and/or copyrighted.
(c) Employee agrees to disclose in writing to the President and CEO of
the Company any Design, Invention or Innovation relating to the business of the
Company and/or its affiliates, which Employee develops, conceives and/or reduces
to practice in connection with any work performed by Employee for the Company,
either alone or with anyone else, while employed by the Company and/or within
twelve (12) months of the termination of employment. Employee shall disclose all
Designs, Inventions and Innovations to the Company, even if Employee does not
believe that he or she is required under this Agreement, or pursuant to
California Labor Code Section 2870, to assign his or her interest in such
Design, Invention or Innovation to the Company. If the Company and Employee
disagree as to whether or not a Design, Invention or Innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
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<PAGE>
(d) Pursuant to California Labor Code Section 2870, the obligation to
assign as provided in this Agreement does not apply to any Design, Invention or
Innovation to the extent such obligation would conflict with any state or
federal law. The obligation to assign as provided in this Agreement does not
apply to any Design, Invention or Innovation that Employee developed entirely on
Employee's own time without using the Company's equipment, supplies, facilities
or Trade Secrets and Confidential Information except those Designs, Inventions
or Innovations that either:
(i) Relate at the time of conception or reduction to practice to
the Company's and/or its affiliates' business, or actual or demonstrably
anticipated research of the Company and/or its affiliates; or
(ii) Result from any work performed by Employee for the Company
and/or its affiliates.
(e) Employee agrees that any Design, Invention and/or Innovation which
is required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company 's
request, at no expense to Employee, Employee shall execute any and all proper
applications for patents, copyrights and/or trademarks, assignments to the
Company, and all other applicable documents, and will give testimony when and
where requested to perfect the title and/or patents (both within and without the
United States) in all Designs, Inventions and Innovations belonging to the
Company.
(f) The provisions of this Section 13 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and the successors and assigns of the Company.
Employee shall have no right to assign his rights, benefits, duties, obligations
or other interests in this Agreement, it being understood that this Agreement is
personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute
or default in connection with any of its provisions, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees
incurred in such action or proceeding as provided in Section 18(f).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company. This Agreement shall
not be modified, amended or terminated except by another instrument in writing
executed by the parties hereto. This Agreement replaces and supersedes any and
all prior understandings or agreements between Employee and the Company
regarding employment.
17. NOTICES. Any notice, request, demand, or other communication required
or
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<PAGE>
permitted hereunder, shall be deemed properly given when actually received or
within five (5) days of mailing by certified or registered mail, postage
prepaid, to:
Employee: Bruce Parker
348 Horizon Drive
Encinitas, California 92024
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Steven C. McCracken
Executive Vice President, Chief Legal Officer
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. IRREVOCABLE ARBITRATION OF DISPUTES.
(a) EMPLOYEE AND THE COMPANY AGREE THAT ANY DISPUTE, CONTROVERSY OR
CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS AGREEMENT, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO EMPLOYEE'S
EMPLOYMENT, OR THE TERMINATION THEREOF, THAT CANNOT BE RESOLVED BY MUTUAL
AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. THIS
INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF FEDERAL, STATE AND/OR
LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF DUTY ARISING IN CONTRACT
OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF THE COVENANT OF GOOD FAITH AND
FAIR DEALING, VIOLATION OF PUBLIC POLICY, VIOLATION OF ANY STATUTORY,
CONTRACTUAL OR COMMON LAW RIGHTS, BUT EXCLUDING WORKERS' COMPENSATION,
UNEMPLOYMENT MATTERS, OR ANY MATTER FALLING WITHIN THE JURISDICTION OF THE STATE
LABOR COMMISSIONER. THE PARTIES AGREE THAT ARBITRATION IS THE PARTIES' ONLY
RECOURSE FOR SUCH CLAIMS AND HEREBY WAIVE THE RIGHT TO PURSUE SUCH CLAIMS IN ANY
OTHER FORUM, UNLESS OTHERWISE PROVIDED BY LAW. ANY COURT ACTION INVOLVING A
DISPUTE WHICH IS NOT SUBJECT TO ARBITRATION SHALL BE STAYED PENDING ARBITRATION
OF ARBITRABLE DISPUTES; PROVIDED, HOWEVER, THAT THE PARTIES SHALL HAVE THE RIGHT
TO SEEK PROVISIONAL RELIEF IN AN ANCILLARY COURT ACTION IN CONNECTION WITH AN
ARBITRABLE DISPUTE.
(b) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE
COMMUNICATED TO THE OTHER PARTY WITHIN ONE (1) YEAR AFTER THE DISCOVERY OF THE
ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED PARTY, OR, IF LATER, WITHIN
THE TIME PERIOD STATED IN THE APPLICABLE STATUTE OF LIMITATIONS.
(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL
RULES STATED IN THE NATIONAL RULES FOR RESOLUTION OF EMPLOYMENT DISPUTES OF THE
AMERICAN ARBITRATION ASSOCIATION ("AAA"). THE ARBITRATION SHALL BE CONDUCTED IN
ORANGE COUNTY BY A FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS
EXPERIENCE IN EMPLOYMENT-RELATED DISPUTES, OR A NON-ATTORNEY WITH LIKE
EXPERIENCE IN THE AREA OF DISPUTE, WHO SHALL HAVE THE POWER TO HEAR MOTIONS,
CONTROL DISCOVERY, CONDUCT HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO
RESOLVE THE MATTER. THE PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR.
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<PAGE>
IF THE PARTIES CANNOT AGREE ON THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN
ARBITRATOR FROM THE AMERICAN ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT
TO THE AMERICAN ARBITRATION ASSOCIATION NATIONAL RULES FOR RESOLUTION OF
EMPLOYMENT DISPUTES.
(d) THE ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE
ENTERED AS A JUDGMENT IN ANY COURT HAVING COMPETENT JURISDICTION. IT IS
EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN ARBITRATION TO AVOID THE
BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND THE ARBITRATOR IS
EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING DISCOVERY AND ANY
HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME, BURDEN AND PUBLICITY
OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN PARTICULAR, THE
PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY CONTROLLING THE
AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF DEPOSITIONS OR
INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY TO ONLY THOSE MATTERS
CLEARLY RELEVANT TO THE DISPUTE. HOWEVER, AT A MINIMUM, EACH PARTY WILL BE
ENTITLED TO ONE DEPOSITION.
(e) THE PARTIES UNDERSTAND AND AGREE THAT THE ARBITRATOR HAS NO
AUTHORITY TO AWARD PUNITIVE DAMAGES.
(f) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION, INCLUDING WITNESS FEES AND EXPERT WITNESS FEES,
UNLESS THE ARBITRATOR FOR GOOD CAUSE DETERMINES OTHERWISE.
(g) THE PROVISIONS OF THIS SECTION SHALL SURVIVE THE EXPIRATION OR
TERMINATION OF THE AGREEMENT, AND SHALL BE BINDING UPON THE PARTIES.
THE PARTIES HAVE READ PARAGRAPH 18 AND IRREVOCABLY AGREE TO ARBITRATE ANY
DISPUTE IDENTIFIED ABOVE.
______ (Employee) ______ (Company)
19. MISCELLANEOUS.
(a) Headings. The headings of the several sections and paragraphs of
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
(b) Waiver. Failure of either party at any time to require performance
by the other of any provision of this Agreement shall in no way affect that
party's rights thereafter to enforce the same, nor shall the waiver by either
party of any breach of any provision hereof be held to be a waiver of any
succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract under
the internal laws of the State of California and shall be governed and construed
in accordance with
12
<PAGE>
the laws of said state as to both interpretation and performance.
(d) Severability. In the event any provision or provisions of this
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
(e) Advertising Waiver. Employee agrees to permit the Company and/or
its affiliates, and persons or other organizations authorized by the Company
and/or its affiliates, to use, publish and distribute advertising or sales
promotional literature concerning the products of the Company and/or its
affiliates, or the machinery and equipment used in the manufacture thereof, in
which Employee's name and/or pictures of Employee taken in the course of
Employee's provision of services to the Company and/or its affiliates, appear.
Employee hereby waives and releases any claim or right Employee may otherwise
have arising out of such use, publication or distribution.
(f) Counterparts. This Agreement may be executed in one or more
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
20. CONDITIONS ON SPECIAL SEVERANCE. Notwithstanding anything else to the
contrary, it is expressly understood that any obligation of the Company to pay
Special Severance pursuant to this Agreement shall be subject to:
(a) Employee's continued compliance with the terms and conditions of
Sections 3, 7, 10, 12, 13, 15, 18, 19 and 21;
(b) Employee must not, directly or indirectly (whether as agent,
consultant, holder of a beneficial interest, creditor, or in any other
capacity), engage in any business which engages directly or indirectly in
competition with the businesses of the Company or any of its affiliates, or have
any interest, direct or indirect, in any person, firm, corporation, or venture
which directly or indirectly competes with the businesses of the Company or any
of its affiliates. For purposes of this section, the ownership of interests in a
broadly based mutual fund shall not constitute ownership of the stocks held by
the fund; and
(c) Employee must not, directly, indirectly, or in any other way,
disparage the Company, its officers or employees, vendors, customers, products
or activities, or otherwise interfere with the Company's press, public and media
relations.
21. SUPERSEDES OLD EXECUTIVE OFFICER EMPLOYMENT AGREEMENT. Employee and
the Company recognize that prior to the effective date of this Agreement they
were parties to a certain Executive Officer Employment Agreement effective
January 1, 1997 (the "Old Officer Employment Agreement"). It is the intent of
the parties that as of the effective date of this Agreement, this Agreement
shall replace and supersede the Old Officer Employment Agreement entirely, that
the Old Officer Employment Agreement shall no longer be of any force or effect
except as to Sections 7, 12, 13, 15 and 18 thereof, and that to the extent there
is any conflict between the Old Officer Employment Agreement and this Agreement,
this Agreement shall control and all agreements shall be construed so as to give
the maximum force and effect to the provisions of this Agreement. It is
specifically understood that as of January 1, 2000, Employee shall no longer
serve as an officer or director
13
<PAGE>
of the Company or any affiliate of the Company, and that the Company is
authorized to take all necessary and appropriate steps to implement such
intentions.
22. INDEMNIFICATION.
(a) Actions by Employee prior to December 31, 1999. The Company shall,
to the maximum extent and in the manner permitted by the General Corporation Law
of Delaware and the Bylaws of the Company, as the same now exist or may
hereafter be amended, indemnify Employee against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which Employee was or is a party or is threatened to be made a
party by reason of the fact that Employee is or was a director or officer of the
Company.
(b) Actions by Employee on or after January 1, 2000. The Company
shall, to the maximum extent and in the manner permitted by the General
Corporation Law of Delaware and the Bylaws of the Company, as the same now exist
or may hereafter be amended, indemnify Employee against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which Employee was or is a party or is threatened
to be made a party by reason of the fact that Employee is or was an employee or
agent of the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
effective the date first written above.
EMPLOYEE COMPANY
Callaway Golf Company,
a Delaware corporation
/s/ Bruce Parker By: /s/ Charles Yash
- ---------------------------- ------------------------------
Bruce Parker Charles Yash, President
14
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EXHIBIT 10.10
RESIGNATION AGREEMENT AND GENERAL RELEASE
This Resignation Agreement and General Release ("Agreement") is effective
November 23, 1999, and is made by and between FREDERICK R. PORT ("Employee") and
CALLAWAY GOLF COMPANY (the "Company"), a Delaware corporation. Employee is
currently employed by the Company pursuant to an Executive Officer Employment
Agreement effective January 1, 1997 and an Amendment to Executive Officer
Employment Agreement effective April 1, 1999 (collectively the "Executive
Officer Employment Agreement"). The Company and Employee desire to enter into
this Agreement pursuant to section 8(h) of the Executive Officer Employment
Agreement to establish certain terms relating to Employee's resignation from his
employment.
1. Resignation. Employee hereby gives notice of his resignation as an
employee of the Company effective February 20, 2000 (the "Resignation Date").
Employee also gives notice of his resignation, effective immediately, as a
director of the Company and as a director or officer of the Company's
affiliates, including but not limited to Callaway Golf Europe, Ltd., Callaway
Golf (Germany) GmbH, Callaway Golf Korea Ltd., Callaway Golf K.K., Callaway Golf
Canada, Callaway Golf Europe, S.A., and the Callaway Golf Company Foundation.
Employee understands and agrees that at any time between the effective date of
this Agreement and the Resignation Date, the CEO of the Company may, in his sole
discretion, with or without substantial cause, (a) remove Employee from any or
all of Employee's positions with the Company and/or any of its subsidiaries or
affiliates, including the positions of Senior Vice President, International
Sales and President, Callaway Golf International, and/or (b) direct Employee to
cease all further activities and efforts on behalf of the Company or any of its
affiliates and/or remain off the premises of the Company and/or its affiliates.
It is understood and expected that in no event will Employee retain his
positions as Senior Executive Vice President, International Sales and President,
Callaway Golf International, beyond December 31, 1999. During the period between
the effective date of this Agreement and the Resignation Date, Employee will
cooperate with the CEO and the President of the Company to implement a smooth
transition of Employee's responsibilities to others designated by the CEO and/or
the President. Employee shall be permitted to use his office for some additional
time after December 31, 1999, up to January 14, 2000, to transition his affairs,
pack his office, and clean up his files. The Company will provide reasonable
secretarial support during this period. Employee agrees not to disrupt or
interfere with the business of the Company during this period. The Company
reserves the right to ask Employee not to come upon Company premises, and may
impose reasonable restrictions upon Employee's access and conduct while on
Company premises.
2. Transition and Severance.
(a) Severance. Unless this Agreement is subsequently terminated for
Substantial Cause (as defined in section 7, below), the Company has agreed to
provide Employee the following severance when his employment ends on February
20, 2000:
(i) payment of one million two hundred thousand dollars
($1,200,000.00), paid in twenty-four (24) equal monthly payments of fifty
thousand dollars ($50,000.00) each, commencing in March 2000 and ending in
February 2002;
(ii) subject to the approval of the Stock Option Committee of the
Company's Board of Directors, the Company shall accelerate the vesting of all
unvested options to purchase the Company's stock which have not vested as of
February 20, 2000, such
<PAGE>
that those options shall vest on February 20, 2000, the date on which Employee's
employment will end. Additionally, and subject to the approval of the Stock
Option Committee of the Company's Board of Directors, the expiration date of the
stock option grants made to Employee pursuant to stock option agreements dated
September 1, 1995 and April 24, 1998, respectively, shall be extended as stated
below:
<TABLE>
<CAPTION>
<S> <C>
September 1, 1995 Grant: 100,000 shares vested 9/1/98 will expire on 9/1/03
100,000 shares vested 9/1/99 will expire on 9/1/04
100,000 shares to vest on 2/20/00 will expire on 2/20/05
April 24, 1998 Grant: 30,000 shares vested on 1/1/99 will expire on 2/20/05
30,000 shares to vest on 1/1/00 will expire on 2/20/05
90,000 shares to vest on 2/20/00 will expire on 2/20/05
</TABLE>
Notwithstanding the above, the expiration date of the stock option grant to
Employee pursuant to the stock option agreement dated February 17, 1999 shall
not be extended and those options shall expire on February 19, 2001, one year
after Employee's employment with the Company ends. Employee will be provided
with a stock option notice that sets forth the vested options and last date to
exercise;
(iii) payment of premiums for group health insurance for Employee
under the Company's currently existing group health insurance policy, or under
an individual health insurance policy consistent with the Company's currently
existing group health insurance coverage for Employee to the extent such
coverage is available, through February 20, 2002;
(iv) payment of premiums for disability insurance for Employee
under the Company's currently existing group disability policy, or under an
individual disability policy or policies consistent with the Company's currently
existing group disability coverage for Employee to the extent such coverage is
available, through February 20, 2002; and
(v) payment of premiums for life insurance for Employee under the
Company's currently existing group term life insurance policy, or under an
individual term life insurance policy or policies consistent with the Company's
currently existing life insurance coverage for Employee ($3,000,000.00 total
coverage) to the extent such coverage is available, through February 20, 2002.
(b) Transition Benefits. At Employee's election, Employee may
participate in the Callaway Golf Company 401k Pension Plan, ESPP, and Executive
Deferred Compensation plan through February 20, 2000, when Employee's employment
will end, at which time participation in these programs will cease pursuant to
the terms of the respective plans.
(c) Country Club Membership. Employee's right to use the Company's Del
Mar Country Club membership will end on February 20, 2000. Employee will
cooperate with the Company to implement the return of the membership privileges
to the Company.
(d) Cooperation. Employee agrees, if requested, to cooperate with the
Company regarding any federal, state or local tax issues arising out of
Employee's employment or this Agreement.
2
<PAGE>
(e) Option to Change Severance. In lieu of the insurance benefits
provided for in subsections 2(iii), (iv) and (v) above, Employee may elect in a
writing delivered to the Company's Chief Legal Officer on or before February 15,
2000, to surrender those benefits and receive instead:
(i) a lump sum cash payment of sixty-thousand five hundred dollars
($60,500.00); and
(ii) payment of premiums for group health insurance for Employee
under the Company's employee plan for eighteen (18) months following the
Resignation Date pursuant to COBRA.
3. Non-Compete During Severance Period. Employee acknowledges and
reaffirms that while he is receiving severance or other consideration from the
Company he will not, directly or indirectly (whether as agent, consultant,
holder of a beneficial interest, creditor, or in any other capacity), engage in
any business or venture which engages directly or indirectly in competition with
the business of the Company or any of its affiliates, or have any interest in
any person, firm corporation, or venture which engages directly or indirectly in
competition with the business of the Company or any of its affiliates. For
purposes of this section, the ownership of interests in a broadly based mutual
fund shall not constitute ownership of the stocks held by the fund. Employee
acknowledges that he will be receiving consideration from the Company, in the
form of severance payments and other benefits as set forth in section 2 above,
until February 20, 2002.
4. Injunction. Employee understands and agrees that the nature of damages
for breach of this Agreement or the Executive Officer Employment Agreement may
be such that an injunction is the only remedy that will protect the Company from
a breach. Employee hereby agrees to the entry of such an injunction by an
appropriate court of competent jurisdiction or an arbitrator (including
enforcement of any arbitration award by a Court) to enjoin any breach of any
obligation owed by Employee to Company.
5. Releases.
(a) Employee's General Release. In consideration for the Severance
Payment described in section 2 and the other obligations agreed to by the
Company pursuant to this Agreement, Employee hereby irrevocably and
unconditionally releases and forever discharges the Company, its predecessors,
successors, subsidiaries, affiliates and benefit plans, and each and every past,
present and future officer, director, employee, representative and attorney of
the Company, its, predecessors, successors, subsidiaries, affiliates and benefit
plans, and their successors and assigns (collectively referred to herein as the
"Company Releasees"), from any, every, and all charges, complaints, claims,
causes of action, and lawsuits of any kind whatsoever, including, to the extent
permitted under the law, all claims which Employee has against the Company
Releasees, or any of them, arising from or in any way related to circumstances
or events arising out of Employee's employment by the Company, including but not
limited to, harassment, discrimination, retaliation, failure to progressively
discipline Employee, termination of Employee's employment, and/or breach of
Executive Officer Employment Agreement, together with any and all other claims
based on the Company's employment of Employee, or any other event occurring
prior to the date of this Agreement. EMPLOYEE ALSO SPECIFICALLY AGREES AND
ACKNOWLEDGES THAT EMPLOYEE IS
3
<PAGE>
WAIVING ANY RIGHT TO RECOVERY AGAINST THE COMPANY RELEASEES BASED ON STATE OR
FEDERAL, SEX, PREGNANCY, RACE, COLOR, NATIONAL ORIGIN, MARITAL STATUS, RELIGION,
VETERAN STATUS, DISABILITY, SEXUAL ORIENTATION, MEDICAL CONDITION OR OTHER
ANTI-DISCRIMINATION LAWS, INCLUDING WITHOUT LIMITATION, TITLE VII, THE AMERICANS
WITH DISABILITIES ACT, AND THE CALIFORNIA FAIR HOUSING AND EMPLOYMENT ACT, OR
BASED ON THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OR THE WORKER ADJUSTMENT
AND RETRAINING NOTIFICATION ACT, ALL AS AMENDED, WHETHER SUCH CLAIM BE BASED
UPON AN ACTION FILED BY EMPLOYEE OR A GOVERNMENTAL AGENCY. Provided. however,
that nothing in the foregoing or otherwise in this Agreement is intended to
waive any of Employee's rights to have the Company defend and/or indemnify him
in accordance with the General Corporation Law of Delaware and the Bylaws of the
Company, as the same now exist or may hereafter be amended, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any threatened, pending or
completed action, suit, or proceeding in which Employee was or is a party or is
threatened to be made a party by reason of the fact that Employee is or was a
director or officer of the Company.
(b) Company's Limited Release. In consideration for the obligations
agreed to by the Employee pursuant to this Agreement, the Company hereby
irrevocably and unconditionally releases and forever discharges Employee, his
successors and assigns (collectively referred to herein as the "Employee
Releasees"), from any, every and all charges, complaints, claims, causes of
action, and lawsuits of any kind that the Company now knows it has or may have
against Employee Releasees, including, to the extent permitted under the law,
all claims which the Company has against the Employee Releasees, or any of them,
arising from or in any way related to known circumstances or events arising out
of Employee's employment by the Company, together with any and all other known
claims based on the Company's employment of Employee, or any other known event
occurring prior to the date of this Agreement. THE COMPANY ALSO SPECIFICALLY
AGREES AND ACKNOWLEDGES THAT IT IS WAIVING ANY RIGHT TO RECOVERY AGAINST
EMPLOYEE RELEASEES BASED ON STATE OR FEDERAL, SEX, PREGNANCY, RACE, COLOR,
NATIONAL ORIGIN, MARITAL STATUS, RELIGION, VETERAN STATUS, DISABILITY, SEXUAL
ORIENTATION, MEDICAL CONDITION OR OTHER ANTI- DISCRIMINATION LAWS, INCLUDING
WITHOUT LIMITATION, TITLE VII, THE AMERICANS WITH DISABILITIES ACT, AND THE
CALIFORNIA FAIR HOUSING AND EMPLOYMENT ACT, OR BASED ON THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OR THE WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT,
ALL AS AMENDED, WHETHER SUCH CLAIM BE BASED UPON AN ACTION FILED BY THE COMPANY
OR A GOVERNMENTAL AGENCY.
6. Waiver. Employee waives all rights under section 1542 of the Civil Code
of the State of California. Section 1542 provides as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
7. Substantial Cause. Employee understands that the Company retains its
right to terminate this Agreement at any time for Substantial Cause.
"Substantial Cause" shall mean, for purposes of this Agreement, failure by
Employee to substantially perform his obligations hereunder or other material
breach of this Agreement, including, without limitation, any breach
4
<PAGE>
of sections 3 or 12 of this Agreement.
8. Entire Agreement. This Agreement and the Executive Officer Employment
Agreement constitute the entire agreement between the parties with respect to
the subject matter hereof and may not be modified or amended, except by written
agreement signed by all parties. This Agreement and the Executive Officer
Employment Agreement shall be deemed to be consistent with each other, and this
Agreement shall be deemed to be "another instrument in writing executed by the
parties," pursuant to section 16 of the Executive Officer Employment Agreement.
9. No Admission of Liability. This Agreement and the release contained
herein affect the settlement of potential or existing claims which are denied
and contested, and nothing contained herein shall be construed as an admission
by a party of any liability of any kind to the other party.
10. Governing Law. This Agreement shall be construed and enforced in
accordance with the internal laws of the State of California.
11. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
12. The Company's Proprietary Information and Inventions. Employee
acknowledges and understands that sections 12 and 13 of the Executive Officer
Employment Agreement extend beyond the terms of Employee's employment with the
Company. Employee agrees to comply with such terms. Employee understands that
his failure to adhere to sections 12 and 13 of the Executive Officer Employment
Agreement shall be a material breach of this Agreement, as well as the Executive
Officer Employment Agreement, and that all benefits under this Agreement and the
Executive Officer Employment Agreement will be forfeited in the event of such a
breach.
13. No Disparagement.
(a) For a period of two years following the Resignation Date, Employee
agrees not to make any statement disparaging the Company, its current or former
employees, vendors, customers, products or activities, or otherwise interfere
with the Company's press, public and media relations. Employee understands that
this is a material obligation under this Agreement.
(b) For a period of two years following the Resignation Date, the
Company agrees to use reasonable efforts to avoid any statement or action by the
Directors or the members of the OCEO that might be disparaging of Employee,
subject to the legal and other disclosure obligations of the Company.
Notwithstanding the above, the Company shall not be responsible for the
unauthorised statements or actions of its directors, officers or employees.
14. Return of Company Property. Employee acknowledges that Employee is
obligated to and will return all Company property by February 20, 2000,
including all computers, facsimile machines, and telephones provided for
business use in Employee's homes.
15. Knowing and Voluntary Agreement. Employee and the Company have
carefully read and fully understand all of the provisions of this Agreement.
Employee and the Company knowingly and voluntarily agree to all the terms set
forth in this Agreement. Employee and the Company knowingly and voluntarily
intend to be legally bound by the same.
5
<PAGE>
16. IRREVOCABLE ARBITRATION OF DISPUTES.
(a) EMPLOYEE AND THE COMPANY AGREE THAT ANY DISPUTE, CONTROVERSY OR
CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS AGREEMENT, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO EMPLOYEE'S
EMPLOYMENT, OR THE TERMINATION THEREOF, THAT CANNOT BE RESOLVED BY MUTUAL
AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. THIS
INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF FEDERAL, STATE AND/OR
LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF DUTY ARISING IN CONTRACT
OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF COVENANT OF GOOD FAITH AND FAIR
DEALING, VIOLATION OF PUBLIC POLICY, VIOLATION OF ANY STATUTORY, CONTRACTUAL OR
COMMON LAW RIGHTS, BUT EXCLUDING WORKERS' COMPENSATION, UNEMPLOYMENT MATTERS, OR
ANY MATTER FALLING WITHIN THE JURISDICTION OF THE STATE LABOR COMMISSIONER. THE
PARTIES AGREE THAT ARBITRATION IS THE PARTIES' ONLY RECOURSE FOR SUCH CLAIMS AND
HEREBY WAIVE THE RIGHT TO PURSUE SUCH CLAIMS IN ANY OTHER FORUM, UNLESS
OTHERWISE PROVIDED BY LAW. ANY COURT ACTION INVOLVING A DISPUTE WHICH IS NOT
SUBJECT TO ARBITRATION SHALL BE STAYED PENDING ARBITRATION OF ARBITRABLE
DISPUTES; PROVIDED, HOWEVER, THAT THE PARTIES SHALL HAVE THE RIGHT TO SEEK
PROVISIONAL RELIEF IN AN ANCILLARY COURT ACTION IN CONNECTION WITH AN ARBITRABLE
DISPUTE.
(b) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE
COMMUNICATED TO THE OTHER PARTY WITHIN ONE (1) YEAR, OR WITHIN THE TIME PERIOD
STATED IN THE APPLICABLE STATUTE OF LIMITATIONS, WHICHEVER IS LONGER, AFTER THE
DISCOVERY OF THE ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED PARTY.
(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL
RULES STATED IN THE AMERICAN ARBITRATION ASSOCIATION ("AAA") CALIFORNIA
EMPLOYMENT DISPUTE RESOLUTION RULES. THE ARBITRATION SHALL BE CONDUCTED IN SAN
DIEGO BY A FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE
IN EMPLOYMENT-RELATED DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE
AREA OF DISPUTE, WHO SHALL HAVE THE POWERS TO HEAR MOTIONS, CONTROL DISCOVERY,
CONDUCT HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER.
THE PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE
ON THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE AMERICAN ARBITRATION
ASSOCIATION CALIFORNIA EMPLOYMENT DISPUTE RESOLUTION RULES.
(d) THE ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE
ENTERED AS A JUDGMENT IN ANY COURT HAVING COMPETENT JURISDICTION. IT IS
EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN ARBITRATION TO AVOID THE
BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND THE ARBITRATOR IS
EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING DISCOVERY AND ANY
HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME, BURDEN AND PUBLICITY
OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN PARTICULAR, THE
PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY CONTROLLING THE
AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF DEPOSITIONS OR
INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY TO ONLY THOSE MATTERS
CLEARLY RELEVANT TO THE DISPUTE. HOWEVER, AT A MINIMUM, EACH PARTY WILL BE
ENTITLED TO ONE DEPOSITION.
(e) THE ARBITRATOR HAS NO AUTHORITY TO AWARD PUNITIVE DAMAGES.
(f) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION, INCLUDING WITNESS FEES AND EXPERT WITNESS FEES,
UNLESS THE ARBITRATOR FOR GOOD CAUSE DETERMINES OTHERWISE.
6
<PAGE>
I HAVE READ SECTION 16 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE IDENTIFIED
ABOVE.
__________ __________
(Employee's initials) (Company's initials)
17. Counterparts. This Agreement may be executed in one or more
counterparts which, when fully executed by the parties, shall be treated as one
agreement.
18. Advice of Counsel. The Company hereby advises Employee in writing to
discuss this Agreement with an attorney before executing it, and Employee
acknowledges that he has done so with Attorney Howard Hay.
19. Severability. In the event any provision or provisions of this
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
dates set forth below, to be effective as of the date first written above.
Employee Company
CALLAWAY GOLF COMPANY,
a Delaware Corporation
/s/ Frederick R. Port By: /s/ Ely Callaway
- ------------------------ -------------------------
Frederick R. Port Ely Callaway
Chairman and CEO
Dated: Dated:
------------------ -------------------
7
<PAGE>
EXHIBIT 10.11
RELEASE
This Release ("Release") is effective as of the date provided for in
section 10 below, and is made by and between FREDERICK R. PORT ("Employee") and
CALLAWAY GOLF COMPANY (the "Company"), a Delaware corporation. Effective
February 20, 2000, Employee's employment with the Company will terminate
pursuant to the terms of a Resignation Agreement and General Release entered
into effective November 23, 1999. The Company and Employee also enter into this
Release relating to Employee's resignation.
1. Payment.
(a) In consideration for the release of claims as set forth in section
2 herein and Employee's execution of this Release, the Company hereby agrees to
pay Employee an amount equal to Employee's pro rata share of the 1999 Officer
Bonus Pool. Employee understands and agrees that the final aggregate bonus pool
for officers pursuant to the 1999 Officer Bonus Pool will not be determined
until the Company's performance is measured against the standards set forth in
the 1999 Officer Bonus Pool, and that such evaluation shall not take place until
early in the year 2000. The payment (less applicable withholding and other
taxes) if any, will be paid to Employee in early 2000, when payment is made to
officers receiving bonuses from the pool.
(b) If the Company elects to provide some form of bonus compensation,
in the form of cash, stock, stock options, or otherwise, based upon performance
in 1999 to its officers other than Ely Callaway, its CEO, and/or Chuck Yash, its
President, in addition to the 1999 Officer Bonus Pool, then Employee shall be
entitled to receive a payment equal to what would have been his pro rata share
of such bonus compensation in addition to any payment he would otherwise receive
pursuant to subsection 1(a) above. In clarification of the foregoing, it is
understood that the Company may provide bonus compensation for 1999 in addition
to any payments from the 1999 Officer Bonus Pool to Mr. Callaway and/or Mr. Yash
without creating additional payment obligations to Employee pursuant to this
subsection. Any payment pursuant to this subsection (less applicable withholding
and other taxes), if any, will be paid to Employee when payment is made to
officers receiving such bonus compensation.
(c) For purposes of subsection 1(a), "pro rata share" shall be a
fraction, the numerator of which shall be six hundred thousand dollars
($600,000.00), and the denominator of which shall be the aggregate base salary
paid to the officers of the Company in 1999. For purposes of subsection 1(b),
"pro rata share" shall be a fraction, the numerator of which shall be six
hundred thousand dollars ($600,000.00), and the denominator of which shall be
the aggregate base salary paid to the officers of the Company in 1999 other than
Mr. Callaway and Mr. Yash.
(d) Employee acknowledges, understands and agrees that payment of any
bonus to Employee pursuant to the 1999 Officer Bonus Pool or otherwise would
have been purely at the discretion of the Company, and that Employee had no
right or entitlement to a bonus from the Company or any of its affiliates for
services rendered in 1999, pursuant to the 1999 Officer Bonus Pool or otherwise.
<PAGE>
2. Release. In consideration for the Payment described in section 1 above,
Employee hereby irrevocably and unconditionally releases and forever discharges
the Company, its predecessors, successors, subsidiaries, affiliates and benefit
plans, and each and every past, present and future officer, director, employee,
representative and attorney of the Company, its predecessors, successors,
subsidiaries, affiliates and benefit plans, and their successors and assigns
(collectively referred to herein as the "Releasees"), from any, every, and all
charges, complaints, claims, causes of action, and lawsuits of any kind
whatsoever, including, to the extent permitted under the law, all claims which
Employee has against Releasees, or any of them, arising from or in any way
related to circumstances or events arising out of Employee's employment by the
Company. EMPLOYEE ALSO SPECIFICALLY AGREES AND ACKNOWLEDGES THAT EMPLOYEE IS
WAIVING ANY RIGHT TO RECOVERY AGAINST RELEASEES BASED ON STATE OR FEDERAL AGE
ANTI-DISCRIMINATION LAWS, INCLUDING WITHOUT LIMITATION, THE AGE DISCRIMINATION
AND EMPLOYMENT ACT OF 1967, AS AMENDED, WHETHER SUCH CLAIM BE BASED UPON AN
ACTION FILED BY EMPLOYEE OR A GOVERNMENTAL AGENCY. Provided, however, that
nothing in the foregoing or otherwise in this Agreement is intended to waive any
of Employee's rights to have the Company defend and/or indemnify him in
accordance with the General Corporation Law of Delaware and the Bylaws of the
Company, as the same now exist or may hereafter be amended, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any threatened, pending or
completed action, suit, or proceeding in which Employee was or is a party or is
threatened to be made a party by reason of the fact that Employee is or was a
director or officer of the Company.
3. Waiver. Employee waives all rights under section 1542 of the Civil Code
of the State of California. Section 1542 provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
4. Governing Law. This Release shall be construed and enforced in
accordance with the internal laws of the State of California.
5. Binding Effect. This Release shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
6. IRREVOCABLE ARBITRATION OF DISPUTES.
(a) EMPLOYEE AND THE COMPANY AGREE THAT ANY DISPUTE, CONTROVERSY OR
CLAIM ARISING HEREUNDER OR IN ANY WAY RELATED TO THIS RELEASE, ITS
INTERPRETATION, ENFORCEABILITY, OR APPLICABILITY, OR RELATING TO EMPLOYEE'S
EMPLOYMENT, OR THE TERMINATION THEREOF, THAT CANNOT BE RESOLVED BY MUTUAL
AGREEMENT OF THE PARTIES SHALL BE SUBMITTED TO BINDING ARBITRATION. THIS
INCLUDES, BUT IS NOT LIMITED TO, ALLEGED VIOLATIONS OF FEDERAL, STATE AND/OR
LOCAL STATUTES, CLAIMS BASED ON ANY PURPORTED BREACH OF DUTY ARISING IN CONTRACT
OR TORT, INCLUDING BREACH OF CONTRACT, BREACH OF COVENANT OF GOOD FAITH AND FAIR
DEALING, VIOLATION OF PUBLIC POLICY, VIOLATION OF ANY STATUTORY, CONTRACTUAL OR
COMMON LAW RIGHTS, BUT EXCLUDING WORKERS' COMPENSATION, UNEMPLOYMENT MATTERS, OR
ANY MATTER FALLING WITHIN THE JURISDICTION OF THE STATE LABOR COMMISSIONER. THE
PARTIES AGREE THAT
2
<PAGE>
ARBITRATION IS THE PARTIES' ONLY RECOURSE FOR SUCH CLAIMS AND HEREBY WAIVE THE
RIGHT TO PURSUE SUCH CLAIMS IN ANY OTHER FORUM, UNLESS OTHERWISE PROVIDED BY
LAW. ANY COURT ACTION INVOLVING A DISPUTE WHICH IS NOT SUBJECT TO ARBITRATION
SHALL BE STAYED PENDING ARBITRATION OF ARBITRABLE DISPUTES; PROVIDED, HOWEVER,
THAT THE PARTIES SHALL HAVE THE RIGHT TO SEEK PROVISIONAL RELIEF IN AN ANCILLARY
COURT ACTION IN CONNECTION WITH AN ARBITRABLE DISPUTE.
(b) ANY DEMAND FOR ARBITRATION SHALL BE IN WRITING AND MUST BE
COMMUNICATED TO THE OTHER PARTY WITHIN ONE (1) YEAR, OR WITHIN THE TIME PERIOD
STATED IN THE APPLICABLE STATUTE OF LIMITATIONS, WHICHEVER IS LONGER, AFTER THE
DISCOVERY OF THE ALLEGED CLAIM OR CAUSE OF ACTION BY THE AGGRIEVED PARTY.
(c) THE ARBITRATION SHALL BE CONDUCTED PURSUANT TO THE PROCEDURAL RULES
STATED IN THE AMERICAN ARBITRATION ASSOCIATION ("AAA") CALIFORNIA EMPLOYMENT
DISPUTE RESOLUTION RULES. THE ARBITRATION SHALL BE CONDUCTED IN SAN DIEGO BY A
FORMER OR RETIRED JUDGE OR ATTORNEY WITH AT LEAST 10 YEARS EXPERIENCE IN
EMPLOYMENT-RELATED DISPUTES, OR A NON-ATTORNEY WITH LIKE EXPERIENCE IN THE AREA
OF DISPUTE, WHO SHALL HAVE THE POWERS TO HEAR MOTIONS, CONTROL DISCOVERY,
CONDUCT HEARINGS AND OTHERWISE DO ALL THAT IS NECESSARY TO RESOLVE THE MATTER.
THE PARTIES MUST MUTUALLY AGREE ON THE ARBITRATOR. IF THE PARTIES CANNOT AGREE
ON THE ARBITRATOR AFTER THEIR BEST EFFORTS, AN ARBITRATOR FROM THE AMERICAN
ARBITRATION ASSOCIATION WILL BE SELECTED PURSUANT TO THE AMERICAN ARBITRATION
ASSOCIATION CALIFORNIA EMPLOYMENT DISPUTE RESOLUTION RULES.
(d) THE ARBITRATION AWARD SHALL BE FINAL AND BINDING, AND MAY BE
ENTERED AS A JUDGMENT IN ANY COURT HAVING COMPETENT JURISDICTION. IT IS
EXPRESSLY UNDERSTOOD THAT THE PARTIES HAVE CHOSEN ARBITRATION TO AVOID THE
BURDENS, COSTS AND PUBLICITY OF A COURT PROCEEDING, AND THE ARBITRATOR IS
EXPECTED TO HANDLE ALL ASPECTS OF THE MATTER, INCLUDING DISCOVERY AND ANY
HEARINGS, IN SUCH A WAY AS TO MINIMIZE THE EXPENSE, TIME, BURDEN AND PUBLICITY
OF THE PROCESS, WHILE ASSURING A FAIR AND JUST RESULT. IN PARTICULAR, THE
PARTIES EXPECT THAT THE ARBITRATOR WILL LIMIT DISCOVERY BY CONTROLLING THE
AMOUNT OF DISCOVERY THAT MAY BE TAKEN (E.G., THE NUMBER OF DEPOSITIONS OR
INTERROGATORIES) AND BY RESTRICTING THE SCOPE OF DISCOVERY TO ONLY THOSE MATTERS
CLEARLY RELEVANT TO THE DISPUTE. HOWEVER, AT A MINIMUM, EACH PARTY WILL BE
ENTITLED TO ONE DEPOSITION.
(e) THE ARBITRATOR HAS NO AUTHORITY TO AWARD PUNITIVE DAMAGES.
(f) THE PREVAILING PARTY SHALL BE ENTITLED TO AN AWARD BY THE
ARBITRATOR OF REASONABLE ATTORNEYS' FEES AND OTHER COSTS REASONABLY INCURRED IN
CONNECTION WITH THE ARBITRATION, INCLUDING WITNESS FEES AND EXPERT WITNESS FEES,
UNLESS THE ARBITRATOR FOR GOOD CAUSE DETERMINES OTHERWISE.
I HAVE READ SECTION 6 AND IRREVOCABLY AGREE TO ARBITRATE ANY DISPUTE
IDENTIFIED ABOVE.
_______________ _______________
(Employee's initials) (Company's initials)
7. Counterparts. This Release may be executed in one or more counterparts
which, when fully executed by the parties, shall be treated as one agreement.
8. Advice of Counsel. The Company hereby advises Employee in writing to
discuss this Release with an attorney before executing it, and Employee
acknowledges that he has
3
<PAGE>
done so with Attorney Howard Hay. Employee further acknowledges that the Company
will provide Employee twenty-one (21) days within which to review and consider
this Release before signing it. Should Employee decide not to use the full
twenty-one (21) days, then Employee knowingly and voluntarily waives any claims
that he was not in fact given that period of time or did not use the entire
twenty-one (21) days to consult an attorney and/or consider this Release.
9. Right to Revoke. The parties acknowledge and agree that Employee may
revoke this Release for up to seven (7) calendar days following Employee's
execution of this Release and that it shall not become effective or enforceable
until the revocation period has expired. The parties further acknowledge and
agree that such revocation must be in writing addressed to Ely Callaway,
Chairman and Chief Executive Officer of Callaway Golf Company (at the address
shown below) and received by Ely Callaway not later than midnight on the seventh
day following the execution of this Release by Employee. If Employee revokes
this Release under this section, it shall not be effective or enforceable, and
Employee will not receive the Payment described in section 1 above.
Ely Callaway
Chairman and Chief Executive Officer
Callaway Golf Company
2285 Rutherford Road
Carlsbad, CA 92008
10. Effective Date. If Employee does not revoke this Release in the
timeframe specified in section 9 above, the Release shall become effective at
12:01 a.m. on the eighth day after it is fully executed by the parties.
11. Severability. In the event any provision or provisions of this Release
is or are held invalid, the remaining provisions of this Release shall not be
affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Release on the
dates set forth below, to be effective as of the date first written above.
Employee Company
CALLAWAY GOLF COMPANY,
a Delaware Corporation
/s/ Frederick R. Port By: /s/ Ely Callaway
- -------------------------- -----------------------------------
Frederick R. Port Ely Callaway, Chairman and CEO
Dated: Dated:
-------------------- ------------------------------
4
<PAGE>
EXHIBIT 13.1
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $714,471 $697,621 $842,927 $678,512 $553,287
Cost of goods sold 376,405 401,607 400,127 317,353 270,125
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit 338,066 296,014 442,800 361,159 283,162
Selling, general and administrative expenses 224,336 245,070 191,313 155,177 120,201
Research and development costs 34,002 36,848 30,298 16,154 8,577
Restructuring costs (Note 12) (5,894) 54,235
Sumitomo transition costs (Note 15) 5,713
Litigation settlement 12,000
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 79,909 (40,139) 209,189 189,828 154,384
Interest and other income, net (Note 9) 9,182 3,911 4,586 5,804 4,038
Interest expense (3,594) (2,671) (10) (37) (21)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 85,497 (38,899) 213,765 195,595 158,401
Income tax provision (benefit) 30,175 (12,335) 81,061 73,258 60,665
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $55,322 ($26,564) $132,704 $122,337 $97,736
- --------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic $0.79 ($0.38) $1.94 $1.83 $1.47
Diluted $0.78 ($0.38) $1.85 $1.73 $1.40
================================================================================================================================
Dividends paid per share $0.28 $0.28 $0.28 $0.24 $0.20
</TABLE>
<TABLE>
(in thousands) December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $112,602 $ 45,618 $ 26,204 $108,457 $ 59,157
Working capital $205,198 $139,598 $209,402 $250,461 $146,871
Total assets $616,783 $655,827 $561,714 $428,428 $289,975
Long-term liabilities $ 11,575 $ 18,723 $ 7,905 $ 5,109 $ 2,207
Total shareholders' equity $499,934 $453,096 $481,425 $362,267 $224,934
================================================================================================================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 AND 1998
For the year ended December 31, 1999, net sales increased $16.9 million, or
2%, to $714.5 million from $697.6 million in the prior year. The increase is
attributable to an increase in sales of metal woods, particularly titanium
metal woods, partially offset by a decrease in sales of irons and by sales of
non-current product through a managed close-out process at substantially
reduced prices. The increase in metal woods sales of $39.1 million (10%) is
largely attributable to the January 1999 introduction of Great Big Bertha(R)
Hawk Eye(R) Titanium Metal Woods and increases in sales of Big Bertha(R)
Steelhead(TM) Metal Woods, which were introduced in August 1998. Sales of
irons decreased $7.8 million, primarily as a result of a $27.6 million
decrease in sales of Big Bertha(R) X-12(R) Irons, which were introduced in
January 1998, partially offset by sales from the August 1999 introduction of
Hawk Eye(R) Tungsten Injected(TM) Titanium Irons of $27.7 million. Sales of
Odyssey(R) and Callaway Golf(R) putters decreased $7.5 million (14%). Sales
of other products decreased $6.9 million (30%).Also included in 1999 net
sales were $56.6 million in sales of non-current product, most of which were
sold at close-out prices.
In terms of net sales by region, sales in the United States decreased
$23.5 million (5%) to $414.1 million for the year ended December 31, 1999.
Net sales in Japan decreased $5.5 million (9%) to $55.9 million, as net
purchases by the Company's distributor declined in anticipation of the
transition of distribution of Callaway Golf(R) products from it to the
Company's wholly-owned Japanese subsidiary. Net sales to Europe remained
relatively constant at $115.7 million and net sales to the rest of Asia and
the rest of the world increased $38.9 million (114%) and $7.6 million (16%),
respectively. Sales to the rest of Asia increased in 1999 over 1998 due
largely to the economic recovery of the Korean market in 1999 and the
introduction of higher- margin products in Korea during 1999. The Company
does not expect that revenue in Korea will continue to increase at a rate
comparable to 1999.
For the year ended December 31, 1999, gross profit increased to $338.1
million from $296.0 million in the prior year, and as a percentage of net
sales increased to 47% from 42%. The increase is primarily due to lower
obsolescence charges in 1999 vs. a $30.0 million excess inventory charge
recorded in the fourth quarter of 1998, and an increase in sales of metal
woods (which carry higher margins). However, gross profit was unfavorably
affected by price reductions on the sales of non- current products through
the Company's managed close-out program and an increase in distribution costs
associated with the Company's foreign subsidiaries.
Selling expenses decreased to $131.9 million in 1999 from $147.0 million
in the prior year. As a percentage of net sales, selling expenses decreased
to 18% from 21%. This decrease is primarily attributable to planned
reductions in advertising, pro tour and other promotional expenses, partially
offset by an increase in employee compensation.
General and administrative expenses decreased to $92.5 million in 1999
from $98.0 million in 1998, or 13% and 14% of net sales, respectively. This
decrease is largely due to decreases in consulting, bad debt expense and
supplies expense, as well as a decrease in building-related costs associated
with the Company's 1998 restructuring program. These amounts were partially
offset by increases in costs associated with the ramp-up of the Company's
golf ball operations and increased depreciation and amortization expense
related to the Company's foreign operations.
Research and development expenses decreased to $34.0 million (5% of net
sales) in 1999 from $36.8 million (5% of net sales) in 1998. This decrease
was primarily the result of the shut-down of the Company's prototype foundry
and a decrease in consulting fees, partially offset by increases in employee
compensation and component prototype costs.
Restructuring income primarily relates to the reversal of a restructuring
reserve recorded in 1998 for a lease obligation in New York City that was
subsequently assigned to a third party. See Note 12 to the Consolidated
Financial Statements for a discussion of this and other restructuring
transactions.
Sumitomo Rubber Industries, Ltd. ("Sumitomo") transition costs represent
payments for non-current product which were associated with the transition of
the distribution of Callaway Golf(R) products from Sumitomo to a wholly-owned
subsidiary of the Company. See "Certain Factors Affecting Callaway Golf
Company - International Distribution" below and Note 15 to the Consolidated
Financial Statements for a discussion of this transaction.
Interest and other income increased to $9.2 million from $3.9 million for
the year ended December 31, 1999 as compared with the prior year. This
increase is primarily attributable to an increase in interest income
resulting from higher average cash and deferred compensation investment
balances during 1999 as compared with 1998, an increase in royalty income and
an increase in other income due to the receipt of insurance proceeds related
to the Company's deferred compensation plan.
Interest expense increased to $3.6 million in 1999 from $2.7 million in
1998. This increase is largely related to
<PAGE>
interest on the Company's interim finance agreement for pre-lease financing
advances for the acquisition and installation costs of machinery and
equipment. Also contributing to the increase was an increase in interest
expense related to the Company's line of credit and accounts receivable
securitiza-tion facilities associated with higher interest and yield rates
and related fees.
During 1999, the Company recorded a tax provision of $30.2 million and
recognized a decrease in deferred taxes of $9.6 million. During 1999, the
Company realized tax benefits of $2.4 million related to the exercise of
stock options, $1.4 million related to non-taxable income from insurance
proceeds related to the Company's deferred compensation plan and $1.0 million
related to the reorganization of a foreign subsidiary.
YEARS ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, net sales were $697.6 million, a 17%
decrease from the prior year. This decrease was primarily due to fewer metal
woods sales, particularly titanium metal woods, along with lower average
sales prices as a result of a metal wood wholesale price reduction on Big
Bertha(R) War Bird(R) Stainless Steel Metal Woods and Great Big Bertha(R) and
Biggest Big Bertha(R) Titanium Metal Woods, both domestically and in many
major international markets. In terms of product sales, the decrease was
attributable to decreases in metal woods sales of $154.4 million, iron sales
of $4.9 million and other product sales of $14.9 million, partially offset by
an increase in Odyssey(R) product sales of $28.9 million, as only five months
of Odyssey Golf, Inc.'s ("Odyssey") results were included in the prior year's
consolidated results (see Note 14 to the Consolidated Financial Statements).
The decrease in metal woods sales was composed of decreases in Great Big
Bertha(R) Metal Woods of $96.8 million, Big Bertha(R) War Bird(R) Metal Woods
of $77.7 million and Biggest Big Bertha(R) Drivers of $57.9 million, which
was partially offset by sales of Big Bertha(R) Steelhead(TM) Metal Woods,
which contributed $78.0 million to sales. The decrease in sales of irons was
attributable to decreases in Big Bertha(R) Irons of $137.6 million, Big
Bertha Gold(R) Irons of $28.3 million and Great Big Bertha(R) Irons of $31.1
million, which was partially offset by a $192.4 million increase in Big
Bertha(R) X-12(R) Irons.
In terms of net sales by region, United States sales decreased $109.6
million (20%) for the year ended December 31, 1998 as compared with 1997. Net
sales in Japan and the rest of Asia decreased $23.2 million (27%) and $19.8
million (37%), respectively, during 1998, while net sales in Europe and
Canada increased by $7.7 million (7%) and $7.7 million (44%), respectively,
during this period.
The Company believes the diversion of consumer purchases to the Company's
new Big Bertha(R) Steelhead(TM) Metal Woods and Big Bertha(R) X-12(R) Irons
from its higher priced titanium metal woods and irons, and marketplace
anticipation of the introduction of the Great Big Bertha(R) Hawk Eye(R)
Titanium Metal Woods in January 1999, also contributed to the decrease in
sales in 1998. Additionally, the Company believes that competition has caused
the Company to lose some market share domestically partly because of pricing
strategies implemented by certain competitors. In addition, the economic
turmoil in Southeast Asia and Japan had an adverse effect on the Company's
sales and results of operations. Sales earlier in the year also were
adversely affected by unusual "El Nino" weather conditions in the United
States. The Company also believes that certain actions by the United States
Golf Association in 1998 contributed to the drop in metal wood sales.
For the year ended December 31, 1998, gross profit decreased to $296.0
million from $442.8 million in the prior year, and gross margin decreased to
42% from 53%. This decrease was primarily attributable to additions to the
reserve for excess inventory of $30.0 million in the fourth quarter, lower
average sales prices as a result of a metal wood wholesale price reduction on
Big Bertha(R) War Bird(R) Stainless Steel Metal Woods and Great Big Bertha(R)
and Biggest Big Bertha(R) Titanium Metal Woods and the accompanying customer
compensation, an increase in warranty expense, and increased manufacturing
labor and overhead costs.
Selling expenses increased to $147.0 million in 1998 from $120.6 million
in 1997. This increase was primarily attributable to costs associated with
Odyssey's putter operations, which the Company acquired in August 1997, and
foreign and domestic subsidiaries acquired during 1998, as well as an
increase in international advertising and other marketing expenses. This
increase was partially offset by a decrease in domestic promotional and
endorsement expenses.
General and administrative expenses increased to $98.0 million in 1998
from $70.7 million in 1997. This increase was due to pre-production and non-
capitalized construction costs of the new golf ball facility, expenses
associated with foreign and domestic subsidiaries acquired during 1998,
expenses associated with the consolidation of the Company's European
operations, expenses associated with Odyssey's putter operations, including
amortization of goodwill, and an increase in the reserve for uncollectable
accounts receivable.
Research and development expenses increased to $36.8 million in 1998 from
$30.3 million in 1997. This increase was primarily attributable to increased
product design costs related to increased employee compensation, consulting
and other
<PAGE>
overhead expenses, including those associated with Callaway Golf Ball Company
and Odyssey's putter operations.
Charges of $54.2 million were recorded in the fourth quarter of 1998
related to the Company's cost reduction actions (see "Restructuring" below).
These charges were primarily composed of $28.7 million for asset impairments,
excess lease costs, and costs to exit various non-core business activities,
including venues, new player development, interactive golf and publishing,
$13.8 million for impairment of assets due to the consolidation of continuing
operations and $11.7 million for employee separation costs.
Other income decreased to $3.9 million in 1998 from $4.6 million in 1997.
This decrease was due to a decrease in interest income resulting from lower
cash balances during 1998 versus 1997 and losses on dispositions of assets in
1998. This decrease was partially offset by net gains on foreign currency
transactions in 1998 of $1.6 million, as compared with net losses in 1997 of
$0.9 million.
Interest expense increased to $2.7 million in 1998 resulting from draws on
the Company's line of credit. The line of credit was not used during 1997.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At December 31, 1999, cash and cash equivalents increased to $112.6 million
from $45.6 million at December 31, 1998. For the year ended December 31,
1999, cash provided by operations of $166.3 million was partially offset by
cash used in investing activities of $53.5 million and cash used in financing
activities of $45.9 million. Cash flows used in investing activities resulted
from capital expenditures, primarily associated with the ramp-up of golf ball
operations and deferred purchase acquisition payments, partially offset by
proceeds from the sale of fixed assets. Of the capital expenditures for 1999,
$50.0 million were sold and leased back pursuant to terms of an equipment
financing and lease agreement (see Note 4 to the Consolidated Financial
Statements). Cash flows used in financing activities are primarily due to the
repayment of loan advances and dividends paid, partially offset by proceeds
from an equipment financing agreement (see Note 4 to the Consolidated
Financial Statements) and the issuance of Common Stock.
The Company's principal source of liquidity, both on a short-term and
long-term basis, has been cash flow provided by operations and the Company's
credit facilities. The Company expects this trend to continue even though
sales increased only slightly in 1999 and the Company does not foresee any
significant improvement in sales during the near term. On February 12, 1999,
the Company consummated the amendment of its line of credit to increase the
revolving credit facility to up to $120.0 million (the "Amended Credit
Agreement") and entered into an $80.0 million accounts receivable
securitization facility (the "Accounts Receivable Facility") (see Notes 4 and
5 to the Consolidated Financial Statements). During the first quarter of
1999, the Company utilized its Accounts Receivable Facility and borrowed
against its line of credit under the Amended Credit Agreement to fund
operations and finance capital expenditures. At December 31, 1999, the
Company had repaid the outstanding balance of the Amended Credit Agreement
with cash flow from operations and had $115.7 million available, net of
outstanding letters of credit, under this credit facility, subject to meeting
certain availability requirements under a borrowing base formula and other
limitations. Also at December 31, 1999, there were no advances under the
Accounts Receivable Facility, leaving up to $80.0 million available under
this facility. Further, in the third and fourth quarters of 1999, the Company
converted its note payable under the Finance Agreement to an operating lease
(see Note 4 to the Consolidated Financial Statements).
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 $18.8 million, of which $8.5 million occurred in 1999. As a
result of the reversal of a portion of certain restructuring reserves
totaling $8.6 million during 1999, due primarily to the assignment of a lease
and the sale of certain of the Company's buildings at terms more favorable
than estimated, expected future cash outlays for restructuring activities
have been reduced and are estimated to be $1.4 million (see Note 12 to the
Consolidated Financial Statements). This amount is expected to be paid by
July 2000. 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. Therefore, the Company does not expect that its
golf ball operations will generate sufficient cash to fund its operations in
2000. However, the Company believes that, based upon its
<PAGE>
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 its 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.
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, into the
operations of the Company while maintaining the distinct and separate
Odyssey(R) brand; the discontinuation, transfer or suspension of certain
initiatives not directly associated with the Company's core business, such as
the Company's involvement with interactive golf sites, golf book publishing,
new player development and a golf venue in Las Vegas; and the re-sizing of
the Company's core business to reflect current and expected business
conditions. These initiatives were completed during 1999, with the exception
of cash outlays related to the assignment of a lease obligation for a
facility in New York City that will continue through July 2000. The
restructuring charges (shown below in tabular format) primarily related to:
1) the elimination of job responsibilities, resulting in costs incurred for
employee severance; 2) the decision to exit certain non-core business
activities, resulting in losses on disposition of the Company's 80% interest
in Callaway Golf Media Ventures (See Note 14 to the Consolidated Financial
Statements), a loss on the sale of the business of All-American (See Note 14
to the Consolidated Financial Statements), as well as excess lease costs; and
3) consolidation of the Company's continuing operations resulting in
impairment of assets, losses on disposition of assets and excess lease costs.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31,
1998, the Company had reduced its non-temporary work force by approximately
750 positions. Although substantially all reductions occurred prior to
December 31, 1998, a small number of reductions occurred in the first quarter
of 1999.
<TABLE>
<CAPTION>
Details of the one-time charge are as follows:
(in thousands) Reserve Reserve
Cash/ One-Time Balance Balance
Non-Cash Charge Activity at 12/31/98 Activity(1) at 12/31/99
-------- ------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $ 3,191
Severance packages Cash 11,603 8,412 3,191 3,191
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $15,394 $ 1,379
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,731
Excess lease costs Cash 12,660 146 12,514 11,135(2) 1,379
Contract cancellation fees Cash 2,700 1,504 1,196 1,196
Other Cash 356 24 332 332
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $10,937
Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 9,634(3)
Excess lease costs Cash 806 4 802 802(4)
Other Cash 613 112 501 501
</TABLE>
(1) Includes reversal of reserve totaling $8.6 million, as actual amounts
differed from estimates. Significant reversals are noted below in (2)
through (4).
(2) Includes reversal of $6.1 million of reserve due to the assignment of lease
obligation at terms significantly more favorable than estimated at the
establishment of the reserve.
(3) Includes reversal of $1.5 million of reserve related to disposition of two
buildings at higher sales prices than estimated.
(4) Includes reversal of $491,000 of reserve due to the sublease of a facility
at terms more favorable than estimated at the establishment of the reserve.
During 1999, the Company incurred charges of $1.3 million on the disposition
of building improvements eliminated during the consolidation of manufacturing
operations, as well as other charges of $671,000. These charges did not meet
the criteria for accru- al in 1998. Additionally, the Company incurred
charges of $749,000 related to asset dispositions and other restructuring
activities for which reserves were not established in 1998. Future cash
outlays are anticipated to be completed by July 2000.
<PAGE>
CERTAIN FACTORS AFFECTING CALLAWAY GOLF COMPANY
- --------------------------------------------------------------------------------
RESTRUCTURING
During 1999, as planned, the Company completed the restructuring of its
operations that it announced during the fourth quarter of 1998. See
"Restructuring" under "Results of Operations" discussed above. Although the
Company was pleased with the restructuring results in 1999, there can be no
assurance that the Company will continue to realize the benefits of the
restructuring.
SALES
Golf Clubs. The Company previously reported that it believed that the dollar
volume of the premium golf club market had been declining in certain major
markets, including the United States.Although the Company believes that
market conditions may have stabilized, there is no assurance that the overall
dollar volume of the premium golf club market in the U.S. will grow
significantly, or that it will not decline, in the near future. During 1999,
the Company's United States revenues decreased 5% while international
revenues increased 16% compared to 1998. The Company believes that this
decrease in United States revenue was due in part to softness in the United
States market, lower revenue per club from sales of golf equipment at low or
close-out prices, and declines in iron and putter sales due to the maturity
of those product lines. The Company believes that the increase in
international revenue is largely attributable to a significant increase in
revenue from sales in Korea as a result of the economic recovery of the
Korean market and the introduction of higher margin products in Korea in
1999. The Company does not expect that revenue in Korea will continue to
increase at a rate comparable to 1999. The Company further believes that some
portion of sales to international customers recorded in 1999 as direct
international sales may have formerly been made to the same international
customers indirectly through the United States distribution channel. See also
"Certain Factors Affecting Callaway Golf Company - Gray Market Distribution."
The Company's brands remained number one in the U.S. and the worldwide
market for woods, irons and putters in 1999. See also "Certain Factors
Affecting Callaway Golf Company - Competition."
Sales of the Company's Great Big Bertha(R) Hawk Eye(R) Titanium Metal
Woods, Big Bertha(R) Steelhead(TM) Metal Woods and Big Bertha(R) X-12(R)
Irons were strong in 1999. Hawk Eye(R) Tungsten Injected(TM) Titanium Irons
were introduced in September 1999, and 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 were released in January 2000. The initial
acceptance of these products has also been strong to date. 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.
The Company formerly reported that golf club sales to Japan might be lower
overall for 1999 as compared to 1998 as the Company's distributor, Sumitomo
Rubber Industries, Ltd. ("Sumitomo"), prepared for the transition of
responsibility from it to the Company's wholly-owned Japanese subsidiary,
Callaway Golf Kabushiki Kaisha ("Callaway Golf K. K."), formerly named ERC
International Company. Although the Company subsequently reported that sales
were not lower through the first nine months of 1999, sales in Japan for all
of 1999 were down 9% compared with 1998, with the reduction largely because
net purchases by Sumitomo, as expected, declined in anticipation of the
transition. In 1999, 1998 and 1997, sales to Sumitomo accounted for 7%, 8%
and 10%, respectively, of the Company's total net sales. 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 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. There also will be a delay in the recording of revenues for sales
in Japan as compared to previous years because revenue will now be recorded
upon sale to retailers and not upon sale to a distributor. See also "Certain
Factors Affecting Callaway Golf Company - International Distribution."
Golf Balls. In 1996, the Company formed Callaway Golf Ball Company, a
wholly- owned subsidiary of the Company, for the purpose of designing,
manufacturing and selling golf balls. The Company had previously licensed the
manufacture and distribution of a golf ball in Japan and Korea. The Company
also had distributed a golf ball under the trademark "Bobby Jones(R)." These
previous golf ball ventures were introduced primarily as promotional efforts
and were not commercially successful.
In February 2000, the Company released 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. To date, the Company's investment in its golf ball business has
exceeded $170 million. 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
<PAGE>
operations and will continue to affect the Company's performance in 2000. The
success of the Company's new golf ball business could be adversely affected
by various risks, including, among others, delays or difficulties in
manufacturing or distribution and unanticipated costs. 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.
Furthermore, although the Company expects production of the golf balls to
increase as the year 2000 progresses, there is no assurance 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.
GROSS MARGIN
The Company's gross margin as a percentage of net sales increased to 47% in
1999 from 42% in 1998. This increase primarily resulted from lower
obsolescence charges in 1999 (vs. a $30.0 million excess inventory charge
recorded in the fourth quarter of 1998), higher metal wood sales (which carry
higher margins) as a percentage of total net sales, as compared to 1998, and
from reductions in manufacturing labor and overhead costs realized through
the Company's 1998 restructuring, along with reductions in certain component
costs. Gross margin as a percentage of net sales would have improved to 49%
but for close-out sales of Great Big Bertha(R) Tungsten.Titanium(TM) Irons,
Great Big Bertha(R) and Biggest Big Bertha(R) Titanium Metal Woods, and Big
Bertha(R) War Bird(R) Metal Woods, which had much lower margins. However,
consumer acceptance of current and new product introductions, the sale and
disposal of non-current products at reduced sales prices and continuing
pricing pressure from competitive market conditions may have an adverse
effect on the Company's future sales and gross margin. Furthermore, the
Company expects that in 2000 the Company's sales of irons as a percentage of
total net sales will increase. This would negatively impact the Company's
gross margin as a percentage of net sales because irons generally sell at
lower margins than woods.
The Company's margins also could be affected by its golf ball business.
During the year 2000, the Company expects that its margins in the golf ball
business will be less than the levels it expects to achieve when the Company
attains a level of operational and sales efficiency that allows it to benefit
from certain economies of scale. There is no assurance, however, that the
Company will achieve the economies of scale necessary to maintain or improve
its current overall sales margins.
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 fourth and first quarters. The Company's golf club business
has generally followed this seasonal trend and the Company expects this to
continue for both its golf club and golf ball businesses. 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, the Company believes that it
has gained unit and dollar market share for woods in the United States during
1999 as compared to 1998. While the Company believes that its products and
its marketing efforts continue to be competitive, there can be no assurance
that successful marketing activities by competitors will not negatively
impact the Company's future sales.
A 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. 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
<PAGE>
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.
While all of the Company's current golf clubs and golf balls have been found
to conform to the Rules of Golf as applied in the jurisdictions where they
are sold, 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. For example,
on November 2, 1998, the USGA announced the adoption of a test protocol to
measure the so-called "spring-like effect" in certain golf clubheads. The
USGA has advised the Company that none of the Company's current clubs sold in
the U.S. are barred by this test. The R&A is considering the adoption of a
similar or related test, but has not yet done so. Both the USGA and the R&A
are reviewing the current regulations of golf, and one or both may change
those regulations in the future. Future actions by the USGA or the R&A may
impede the Company's ability to introduce new products and therefore could
have a material adverse effect on the Company's results of operations and
cash flows.
The Company's new products have tended to incorporate significant
innovations in design and manufacture, which have 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 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 BREAKAGE
The Company supports all of its golf clubs with a limited two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. In addition, the
Company's Biggest Big Bertha(R) Drivers, because of their large club head
size and extra long, lightweight graphite shafts, have experienced shaft
breakage at a rate higher than generally experienced with the Company's other
metal woods, even though these shafts were among the most expensive to
manufacture in the industry. This product was discontinued in 1999. While any
breakage or warranty problems are deemed significant to the Company, the
incidence of clubs returned as a result of cracked clubheads, broken graphite
shafts, loose medallions and other product problems to date has not been
material in relation to the volume of Callaway Golf(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.
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
<PAGE>
requires no collateral from these customers. Historically, the Company's bad
debt expense has been low. However, the recent downturn in the retail golf
equipment market, primarily in the United States, has resulted in delinquent
or uncollectible accounts for some of the Company's significant customers. As
a result, during 1999 the Company wrote off approximately $5.3 million of
past due trade accounts receivable against the Company's reserve for
uncollectible accounts receivable. Management does not foresee any
significant improvement in the U.S. retail golf equipment market during 2000.
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 or cash
flows.
DEPENDENCE ON CERTAIN VENDORS AND MATERIALS
The Company is dependent on a limited number of suppliers for its club heads
and shafts. In addition, some of the Company's products require specifically
developed manufacturing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. The Company believes that
suitable club heads 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
be adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
Various patents have been issued to the Company's competitors in the golf
ball industry. As Callaway Golf Ball Company 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 Company's
new golf ball products infringe any patent or other rights of competitors. If
the Company's 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 the Company could incur
<PAGE>
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 and the PGA European Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's
products despite contractual commitments. If certain of 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. In addition, the Company has created cash
pools ("Pools") that reward such usage. However, in 1999, 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 the year 2000.
For the last several years, the Company has experienced an exceptional
level of driver penetration on the world's five major professional tours, and
the Company has heavily advertised that fact. While it is not clear to what
extent professional usage contributes to retail sales, it is possible that
the recent decline in the level of professional usage of the Company's
products could have a material adverse effect on the Company's business.
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
<PAGE>
has been and will be an element in the future growth and success of the
Company. The Company has been actively pursuing a reorganization of its
international operations, including the acquisition of distribution rights in
certain key countries in Europe, Asia and North America. These efforts have
resulted and will continue to result in 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 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. As a result of the transition agreement, the
Company recorded a net charge of $8.6 million in the fourth quarter of 1999
for buying certain current inventory, payments for non-current inventory and
other transition expenses, including foreign currency transaction losses.
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. In addition to the
fourth quarter 1999 charges noted above, there will be significant costs and
capital expenditures invested in Callaway Golf K. K. before there will be
sales sufficient to support such costs. Furthermore, 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. There also will be a delay in the
recording of revenues for sales in Japan as compared to previous years
because revenue now will be recorded upon sale to retailers and not upon sale
to a distributor.
YEAR 2000 ISSUE
The Y2K issue is the name given to the computer program problem whereby two
digits rather than four were used to define the applicable year, which could
result in the program failing to properly recognize a year that begins with
"20" instead of "19." This, in turn, could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" or "Y2K"
issue. A more detailed description of the risks associated with the Y2K issue
as applied to the Company and the Company's remedial actions and contingency
plans for the Y2K issue are contained in certain of the Company's prior
filings with the Securities and Exchange Commission, including its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.
The Y2K issue has not had, and is not expected to have, any material
adverse effect on the Company. In 1998 and 1999 the Company formulated and
implemented a Year 2000 Plan to address the Company's Y2K issue. To date, the
Company's computer systems and manufacturing facilities have operated without
any significant Year 2000 problems and appear to be Year 2000 compliant. The
Company is not aware that any of its major third party suppliers have
experienced any significant Year 2000 problems. The Company currently does
not expect any significant future disruptions in its operations as a result
of the Y2K issue. Nevertheless, since it is impossible to predict all future
outcomes, there could be circumstances in which the Company could be
adversely affected.
The total cost associated with the assessment and required modifications
to implement the Company's Year 2000 Plan to date has not been material to
the Company's financial position or results of operations. The Company does
not expect to incur any significant future expenses related to the Y2K issue.
The total amount expended on the Year 2000 plan through December 1999 was
$2.7 million, of which approximately $1.2 million related to repair or
replacement of software and related hardware problems and approximately $1.5
million related to internal and external labor costs.
EURO CURRENCY
Many of the countries in which the Company sells its products are Member
States of the Economic and Monetary Union
<PAGE>
("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. During 2000, the Company intends to upgrade its business system. The
upgraded version of this business system should 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, 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.
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, beginning in January 1999, the Company
may use forward foreign currency exchange rate contracts to hedge certain
firm commitments and the related receivables and payables with its foreign
subsidiaries. During 1999, the Company entered into such contracts on behalf
of two of its wholly-owned subsidiaries, Callaway Golf Europe Ltd. and
Callaway Golf Canada Ltd. The Company also hedged certain yen-denominated
transactions with its Japanese distributor. The effect of this practice is to
minimize variability in the Company's operating results arising from foreign
exchange rate movements. These foreign exchange contracts generally do not
subject the Company to risk due to exchange rate movements because gains and
losses on these contracts offset losses and gains on the transactions being
hedged, and the Company does not engage in hedging contracts which exceed the
amounts of these transactions.
Also pursuant to its 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 4 and 5
to the Company's Consolidated Financial Statements) which are indexed to the
London Interbank Offering Rate ("LIBOR") and Redwood Receivables Corporation
Commercial Paper Rate. No amounts were outstanding or advanced under these
facilities at December 31, 1999.
Sensitivity analysis is the measurement of potential loss in future
earnings of market sensitive instruments resulting from one or more selected
hypothetical changes in interest rates or foreign currency values. The
Company used a sensitivity analysis model to quantify the estimated potential
effect of unfavorable movements of 10% in foreign currencies to which the
Company was exposed at December 31, 1999 through its derivative financial
instruments.
The sensitivity analysis model is a risk analysis tool and does not
purport to represent actual losses in earnings that will be incurred by the
Company, nor does it consider the potential effect of favorable changes in
market rates. It also does not represent the maximum possible loss that may
occur. Actual future gains and losses will differ from those estimated
because of changes or differences in market rates and interrelationships,
hedging instruments and hedge percentages, timing and other factors.
The estimated maximum one-day loss in earnings from the Company's foreign-
currency derivative financial instruments, calculated using the sensitivity
analysis model described above, is $112,000 at December 31, 1999. The Company
believes that such a hypothetical loss from its derivatives would be offset
by increases in the value of the underlying transactions being hedged.
Notes 4 and 5 to the Consolidated Financial Statements outline the
principal amounts, and other terms required to evaluate the expected cash
flows and sensitivity to interest rate changes.
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands, except share and per share data) December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 112,602 $ 45,618
Accounts receivable, net 54,252 73,466
Inventories, net 97,938 149,192
Deferred taxes 32,558 51,029
Other current assets 13,122 4,301
- --------------------------------------------------------------------------------------------------------
Total current assets 310,472 323,606
Property, plant and equipment, net 142,214 172,794
Intangible assets, net 120,143 127,779
Other assets 43,954 31,648
- --------------------------------------------------------------------------------------------------------
$ 616,783 $ 655,827
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 46,664 $ 35,928
Accrued employee compensation and benefits 21,126 11,083
Accrued warranty expense 36,105 35,815
Line of credit 70,919
Note payable 12,971
Accrued restructuring costs 1,379 7,389
Income taxes payable 9,903
- --------------------------------------------------------------------------------------------------------
Total current liabilities 105,274 184,008
Long-term liabilities:
Deferred compensation 11,575 7,606
Accrued restructuring costs 11,117
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized, none issued and
outstanding at December 31, 1999 and 1998
Common Stock, $.01 par value, 240,000,000 shares authorized, 76,302,196 and
75,095,087 issued and outstanding
at December 31, 1999 and 1998 763 751
Paid-in capital 307,329 258,015
Unearned compensation (2,784) (5,653)
Retained earnings 288,090 252,528
Accumulated other comprehensive income 280 1,780
Less: Grantor Stock Trust (5,300,000 shares at December 31, 1999
and 1998) at market (Note 6) (93,744) (54,325)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 499,934 453,096
- --------------------------------------------------------------------------------------------------------
$ 616,783 $ 655,827
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 714,471 100% $ 697,621 100% $ 842,927 100%
Cost of goods sold 376,405 53% 401,607 58% 400,127 47%
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 338,066 47% 296,014 42% 442,800 53%
Selling expenses 131,858 18% 147,022 21% 120,589 14%
General and administrative expenses 92,478 13% 98,048 14% 70,724 8%
Research and development costs 34,002 5% 36,848 5% 30,298 4%
Restructuring costs (Note 12) (5,894) (1%) 54,235 8%
Sumitomo transition costs (Note 15) 5,713 1%
Litigation settlement 12,000 1%
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 79,909 11% (40,139) (6%) 209,189 25%
Interest and other income, net (Note 9) 9,182 3,911 4,586
Interest expense (3,594) (2,671) (10)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 85,497 12% (38,899) (6%) 213,765 25%
Income tax provision (benefit) 30,175 (12,335) 81,061
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 55,322 8% ($ 26,564) (4%) $ 132,704 16%
======================================================================================================================
Earnings (loss) per common share:
Basic $ 0.79 ($ 0.38) $ 1.94
Diluted $ 0.78 ($ 0.38) $ 1.85
Common equivalent shares:
Basic 70,397 69,463 68,407
Diluted 71,214 69,463 71,698
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Year ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 55,322 ($ 26,564) $ 132,704
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 39,877 35,885 19,408
Non-cash compensation 1,390 2,887 2,041
Tax benefit from exercise of stock options 2,377 3,068 29,786
Deferred taxes 9,971 (36,235) 1,030
Non-cash restructuring costs (8,609) 25,497
Loss on disposal of assets 315 1,298 2
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable, net 19,690 51,575 (36,936)
Inventories, net 51,092 (42,665) 6,271
Other assets (12,966) (12,149) (6,818)
Accounts payable and accrued expenses 12,225 (4,357) 13,529
Accrued employee compensation and benefits 9,875 (3,411) (2,437)
Accrued warranty expense 286 7,760 756
Income taxes payable (10,001) 9,652 (2,636)
Accrued restructuring costs (3,476) 7,389
Deferred compensation 3,969 (299) 2,796
Accrued restructuring costs - long-term (5,041) 11,117
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 166,296 30,448 159,496
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (56,244) (67,859) (67,938)
Acquisitions, net of cash acquired (2,389) (10,672) (129,256)
Proceeds from sale of assets 5,095 3,417 72
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (53,538) (75,114) (197,122)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (payments on) proceeds from line of credit (70,919) 70,919
Proceeds from note payable 35,761 12,971
Short-term debt retirement (10,373)
Issuance of Common Stock 9,009 10,343 27,530
Retirement of Common Stock (917) (52,985)
Dividends paid, net (19,760) (19,485) (19,123)
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (45,909) 63,458 (44,578)
- -------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 135 622 (49)
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 66,984 19,414 (82,253)
Cash and cash equivalents at beginning of year 45,618 26,204 108,457
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 112,602 $ 45,618 $ 26,204
===========================================================================================
Supplemental disclosures:
Non-cash financing (Note 4) $ 48,732
Cash paid for interest and fees $ 3,637 $ 2,162 $ 10
Cash paid for income taxes $ 30,670 $ 8,165 $ 54,358
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands)
Accumulated Current
Common Stock Other Year's
------------------ Paid-In Unearned Retained Comprehensive Comprehensive
Shares Amount Capital Compensation Earnings Income GST Total Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 72,855 $729 $278,669 $(3,105) $ 238,113 $ 236 $(152,375) $ 362,267
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 2,877 29 21,529 21,558
Tax benefit from exercise of
stock options 29,786 29,786
Compensatory stock options 2,511 (470) 2,041
Employee stock purchase plan 372 4 5,968 5,972
Stock retirement (1,852) (19) (52,966) (52,985)
Cash dividends (20,607) (20,607)
Dividends on shares held by GST 1,484 1,484
Adjustment of GSTshares to
market value (1,060) 1,060
Equity adjustment from foreign
currency translation (795) (795) $ (795)
Net income 132,704 132,704 132,704
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 74,252 743 337,403 (3,575) 298,728 (559) (151,315) 481,425 $ 131,909
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 391 4 4,433 4,437
Tax benefit from exercise of
stock options 3,068 3,068
Issuance of Restricted
Common Stock 130 1 4,029 (4,030)
Cancellation of Restricted
Common Stock (19) (597) 597
Compensatory stock and
stock options 1,532 1,355 2,887
Employee stock purchase plan 386 4 5,902 5,906
Stock retirement (45) (1) (765) (151) (917)
Cash dividends (20,969) (20,969)
Dividends on shares held by GST 1,484 1,484
Adjustment of GSTshares to
market value (96,990) 96,990
Equity adjustment from foreign
currency translation 2,339 2,339 $ 2,339
Net loss (26,564) (26,564) (26,564)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 75,095 751 258,015 (5,653) 252,528 1,780 (54,325) 453,096 $ (24,225)
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 851 8 5,362 5,370
Tax benefit from exercise of
stock options 2,377 2,377
Cancellation of Restricted
Common Stock (22) (684) 684
Compensatory stock and
stock options (795) 2,185 1,390
Employee stock purchase plan 378 4 3,635 3,639
Cash dividends (21,244) (21,244)
Dividends on shares held by GST 1,484 1,484
Adjustment of GSTshares to
market value 39,419 (39,419)
Equity adjustment from foreign
currency translation (1,500) (1,500) $ (1,500)
Net income 55,322 55,322 55,322
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 76,302 $763 $307,329 $(2,784) $288,090 $ 280 $(93,744) $499,934 $ 53,822
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
THE COMPANY
- --------------------------------------------------------------------------------
Callaway Golf Company ("Callaway Golf" or the "Company") was incorporated in
California in 1982 and was reincorporated in Delaware in 1999. The Company
designs, develops, manufactures and markets high-quality, innovative golf
clubs. Callaway Golf's primary products for the periods presented include
Great Big Bertha(R) Hawk Eye(R) Titanium Metal Woods, Big Bertha(R)
Steelhead(TM) Metal Woods, Biggest Big Bertha(R) Titanium Drivers, Great Big
Bertha(R) Titanium Metal Woods, Big Bertha(R) Metal Woods with the War
Bird(R) soleplate, Great Big Bertha(R) Tungsten Injected(TM) Titanium Irons,
Big Bertha(R) X-12(R) Irons, Great Big Bertha(R) Tungsten.Titanium(TM) Irons,
Big Bertha(R) Irons, Odyssey(R) putters and wedges and various other putters.
NOTE 2
SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the periods presented include the
accounts of the Company and its subsidiaries, Callaway Golf Sales Company,
Golf Funding Corporation ("Golf Funding"), Callaway Golf Ball Company,
Odyssey Golf, Inc. ("Odyssey"), CGV, Inc., All-American Golf LLC
("All-American"), Callaway Golf Media Ventures ("CGMV"), Callaway Golf Europe
Ltd., Callaway Golf Europe, S.A., Callaway Golf K.K. (formerly named ERC
International Company), Callaway Golf (Germany) GmbH, Callaway Golf Canada
Ltd. and Callaway Golf Korea, Ltd.. All significant intercompany transactions
and balances have been eliminated. The Company sold the business
ofAll-American in 1998 and its interest in CGMV in March 1999 (Note 14).
Callaway Golf Europe, S.A. was merged with Callaway Golf Europe Ltd. in 1999
(Note 14).
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Examples of such estimates include provisions for warranty, uncollectible
accounts receivable, inventory obsolescence and restructuring costs (Note
12). Actual results could differ from those estimates, which could materially
affect future results of operations.
REVENUE RECOGNITION
Sales are recognized at the time goods are shipped, net of an allowance for
sales returns.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
trade receivables and payables, forward foreign currency exchange contracts,
its revolving line of credit and note payable (Note 4) and its accounts
receivable securitiza-tion facility (Note 5). The carrying amounts of these
instruments approximate fair value because of their short maturities and
variable interest rates.
ADVERTISING COSTS
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs,
as incurred. Advertising expenses for 1999, 1998 and 1997 were $26,202,000,
$32,944,000 and $20,320,000 respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative
translation gains or losses are recorded as accumulated other comprehensive
income in shareholders' equity. Gains or losses resulting from foreign
currency transactions (transactions denominated in a currency other than the
entity's local currency) are included in the consolidated statement of
operations. The Company recorded transaction losses of $793,000 in 1999,
transaction gains of $1,598,000 in 1998 and transaction losses of $940,000 in
1997.
During 1999, 1998 and 1997, the Company entered into forward foreign
currency exchange rate contracts to hedge payments due on intercompany
transactions by certain of its wholly-owned foreign subsidiaries. The Company
also hedged certain yen-denominated transactions with its Japanese
distributor. Realized and unrealized gains and losses on these contracts are
recorded in income. The effect of this practice is to minimize variability in
the Company's operating results arising from foreign exchange rate movements.
The Company does not engage in foreign currency speculation. These foreign
exchange contracts generally do not subject the Company to risk due to
exchange rate movements because gains and losses on these contracts offset
losses and gains on the intercom-pany transactions being hedged, and the
Company does not engage in hedging contracts which exceed the amount of the
intercompany transactions. At December 31, 1999, 1998 and 1997, the Company
had approximately $7,117,000, $11,543,000 and $2,575,000, respectively, of
foreign exchange contracts outstanding. The contracts outstanding at
<PAGE>
December 31, 1999 mature between January and June of 2000. The Company had
net realized and unrealized gains on foreign exchange contracts of $358,000,
$57,000 and $261,000 in 1999, 1998 and 1997, respectively.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. Changes in the fair value of derivatives are recorded each period
in income or other comprehensive income, depending on whether the derivatives
are designated as hedges and, if so, the types of hedges. SFAS No. 133 is
effective for all periods beginning after June 15, 2000; the Company elected
to adopt early SFAS No. 133 on January 1, 1999.
Adoption of this statement did not significantly affect the way in which
the Company currently accounts for derivatives to hedge payments due on
intercompany transactions, as described above. Accordingly, no cumulative
effect adjustments were made. However, the Company expects that it also may
hedge anticipated transactions denominated in foreign currencies using
forward foreign currency exchange rate contracts and put or call options. The
forward contracts used to hedge anticipated transactions will be recorded as
either assets or liabilities in the balance sheet at fair value. Gains and
losses on such contracts will be recorded in other comprehensive income and
will be recorded in income when the anticipated transactions occur. The
ineffective portion of all hedges will be recognized in current period
earnings.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income for the
period by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share is calculated by dividing net
income for the period by the weighted-average number of common shares
outstanding during the period, increased by dilutive potential common shares
("dilutive securities") that were outstanding during the period. Dilutive
securities include shares owned by the Callaway Golf Company Grantor Stock
Trust (Note 6), options issued pursuant to the Company's stock option plans
(Note 8), potential shares related to the Employee Stock Purchase Plan (Note
8) and rights to purchase preferred shares under the Callaway Golf Company
Shareholder Rights Plan (Note 8). Dilutive securities related to the Callaway
Golf Company Grantor Stock Trust and the Company's stock option plans are
included in the calculation of diluted earnings per common share using the
treasury stock method. Dilutive securities related to the Employee Stock
Purchase Plan are calculated by dividing the average withholdings during the
period by 85% of the lower of the offering period price or the market value
at the end of the period. The dilutive effect of rights to purchase preferred
shares under the Callaway Golf Shareholder Rights Plan have not been included
as dilutive securities because the conditions necessary to cause these rights
to be redeemed were not met. A reconciliation of the numerators and
denominators of the basic and diluted earnings per common share calculations
for the years ended December 31, 1999, 1998 and 1997 is presented in Note 7.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with maturities of
three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over
estimated useful lives of two to 30 years. The Company's property, plant and
equipment generally are depreciated over the following periods:
------------------------------------------------------------
Buildings and improvements 10-30 years
Machinery and equipment 5-15 years
Furniture, computers and equipment 3-5 years
Production molds 2 years
------------------------------------------------------------
Normal repairs and maintenance are expensed as incurred. Expenditures that
materially increase values, change capacities or extend useful lives are
capitalized. Replacements are capitalized and the property, plant, and
equipment accounts are relieved of the items being replaced. The related
costs and accumulated depreciation of disposed assets are eliminated and any
resulting gain or loss on disposition is included in income.
The Company capitalizes certain software development and implementation
costs. Development and implementation costs are expensed until management has
determined that the software will result in probable future economic benefit
and management has committed to funding the project. Thereafter, all direct
external implementation costs, as well as purchased software costs, are
capitalized and amortized using the straight-line method over the remaining
estimated useful lives, not exceeding five years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-LIVED ASSETS
The Company assesses potential impairments of its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net cash flows is less than
the carrying amount of the asset. During the fourth quarter of 1998, the
Company implemented a restructuring plan that included a number of cost
reduction actions and operational improvements (Note 12). As a result of this
plan, impairment losses were recorded in 1998 for certain of the Company's
long-lived assets.
INTANGIBLE ASSETS
Intangible assets consist primarily of trade name, trademark, trade dress,
patents and goodwill resulting from the purchase of substantially all of the
assets and certain liabilities of Odyssey Sports, Inc. and goodwill
associated with the purchase of certain foreign distributors (Note 14).
Intangible assets are amortized using the straight-line method over periods
ranging from three to 40 years. During 1999, 1998 and 1997, amortization of
intangible assets was $7,476,000, $5,466,000 and $1,778,000 respectively.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation awards using the intrinsic value method. Pro forma disclosures
of net income and earnings per share, as if the fair value-based method had
been applied in measuring compensation expense, are presented in Note 8.
Compensation expense for non-employee stock-based compensation awards is
measured using the fair-value method.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the net change during the year in the
deferred income tax asset or liability.
Deferred taxes have not been provided on the cumulative undistributed
earnings of foreign subsidiaries since such amounts are expected to be
reinvested indefinitely. The Company provides a valuation allowance for its
deferred tax assets when, in the opinion of management, it is more likely
than not that such assets will not be realized.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that all components
of comprehensive income be reported in the financial statements in the period
in which they are recognized. The components of comprehensive income for the
Company include net income and foreign currency translation adjustments.
Since the Company has met the indefinite reversal criterion, it does not
accrue income taxes on foreign currency translation adjustments.
SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Diclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
industry segment approach with the management approach. The management
approach designates the international organization that is used by management
for making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
this standard did not affect the Company's results of operations, financial
position or cash flows. This information is presented in Note 15.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash equivalents and trade receivables.
The Company may invest its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. During 1999 and 1998, no investments in
U.S. Government securities were held.
The Company operates in the golf equipment industry and primarily sells
its products to golf equipment retailers and foreign distributors. The
Company performs ongoing credit evaluations of its customers'financial
condition and generally requires no collateral from these customers. The
Company maintains reserves for potential credit losses, which it considers
adequate to cover any such losses.
During 1999, 1998, and 1997, approximately 42%, 38% and 35%, respectively,
of the Company's net sales were made to foreign customers. An adverse change
in either economic conditions abroad or the Company's relationship with
significant distributors could negatively impact the volume of the Company's
international sales and the Company's results of operations, cash flows and
financial position.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
<PAGE>
NOTE 3
SELECTED FINANCIAL STATEMENT INFORMATION
- --------------------------------------------------------------------------------
(in thousands) December 31,
1999 1998
- --------------------------------------------------------------------------------
Cash and cash equivalents:
Cash, interest bearing $ 110,157 $ 41,689
Cash, non-interest bearing 2,445 3,929
- --------------------------------------------------------------------------------
$ 112,602 $ 45,618
================================================================================
Accounts receivable, net:
Trade accounts receivable $ 59,543 $ 83,405
Allowance for doubtful accounts (5,291) (9,939)
- --------------------------------------------------------------------------------
$ 54,252 $ 73,466
================================================================================
Inventories, net:
Raw materials $ 45,868 $ 102,352
Work-in-process 1,403 1,820
Finished goods 65,661 81,868
- --------------------------------------------------------------------------------
112,932 186,040
Reserve for obsolescence (14,994) (36,848)
- --------------------------------------------------------------------------------
$ 97,938 $ 149,192
================================================================================
Property, plant and equipment, net:
Land $ 12,358 $ 13,375
Buildings and improvements 87,910 55,307
Machinery and equipment 50,942 57,334
Furniture, computers and equipment 64,334 55,629
Production molds 22,714 17,472
Construction-in-process 5,032 52,920
- --------------------------------------------------------------------------------
243,290 252,037
Accumulated depreciation (101,076) (79,243)
- --------------------------------------------------------------------------------
$ 142,214 $ 172,794
================================================================================
Intangible assets:
Trade name $ 69,629 $ 69,629
Trademark and trade dress 29,841 29,841
Patents, goodwill and other 34,911 35,765
- --------------------------------------------------------------------------------
134,381 135,235
Accumulated amortization (14,238) (7,456)
- --------------------------------------------------------------------------------
$ 120,143 $ 127,779
================================================================================
Accounts payable and accrued expenses:
Accounts payable $ 11,297 $ 10,341
Note to related party (Note 16) 6,766
Accrued expenses 35,367 18,821
- --------------------------------------------------------------------------------
$ 46,664 $ 35,928
================================================================================
Accrued employee compensation and benefits:
Accrued payroll and taxes $ 15,303 $ 6,178
Accrued vacation and sick pay 4,571 4,423
Accrued commissions 1,252 482
- --------------------------------------------------------------------------------
$ 21,126 $ 11,083
================================================================================
NOTE 4
BANK LINE OF CREDIT AND NOTE PAYABLE
- --------------------------------------------------------------------------------
On February 12, 1999, the Company consummated the amendment of its credit
facility to increase the facility to up to $120,000,000 (the "Amended Credit
Agreement"). The Amended Credit Agreement has a five-year term and is secured
by substantially all of the assets of the Company. The Amended Credit
Agreement bears interest at the Company's election at the London Interbank
Offering Rate ("LIBOR") plus a margin or the higher of the base rate on
corporate loans at large U.S. money center commercial banks (prime rate) or
the Federal Funds Rate plus 50 basis points. The line of credit requires the
Company to maintain certain minimum financial ratios, including a fixed
charge coverage ratio, as well as other restrictive covenants. As of December
31, 1999, up to $115,739,000 of the credit facility remained available for
borrowings (including a reduction of $4,261,000 for outstanding letters of
credit), subject to meeting certain availability requirements under a
borrowing base formula and other limitations.
On December 30, 1998, Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, entered into a master lease agreement for the
acquisition and lease of up to $56,000,000 of machinery and equipment. As of
December 31, 1999, the Company had finalized its lease program and leased
$50,000,000 of equipment pursuant to the master lease agreement. This lease
program includes a interim finance agreement (the "Finance Agreement"). The
Finance Agreement provides pre-lease financing advances for the acquisition
and installation costs of the aforementioned machinery and equipment. The
Finance Agreement bears interest at LIBOR plus a margin and is secured by the
underlying machinery and equipment and a corporate guarantee from the
Company. During the third and fourth quarters of 1999, the Company converted
the balance of this note payable to the operating lease discussed above. As
of December 31, 1999, no amount was outstanding under this facility.
<PAGE>
NOTE 5
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. Pursuant to an agreement effective February 12, 1999 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
December 31, 1999, no amount was outstanding under the Accounts Receivable
Facility. Fees incurred in connection with the sale of accounts receivable
for year ended December 31, 1999 were $923,000 and were recorded as interest
expense.
NOTE 6
GRANTOR STOCK TRUST
- --------------------------------------------------------------------------------
In July 1995, the Company established the Callaway Golf Company Grantor Stock
Trust (the "GST"). In conjunction with the formation of the GST, the Company
sold 4,000,000 shares of newly issued Common Stock to the GSTat a purchase
price of $60,575,000 ($15.14 per share). In December 1995, the Company sold
an additional 1,300,000 shares of newly issued Common Stock to the GSTat a
purchase price of $26,263,000 ($20.20 per share). The sale of these shares
had no net impact on shareholders'equity. During the term of the GST, shares
in the GSTmay be used to fund the Company's obligations with respect to one
or more of the Company's non- qualified or qualified employee benefit plans.
Shares owned by the GST are accounted for as a reduction to
shareholders'equity until used in connection with employee benefits. Each
period, the shares owned by the GST are valued at the closing market price,
with corresponding changes in the GSTbalance reflected in capital in excess
of par value.
NOTE 7
EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
The schedule below summarizes the elements included in the calculation of
basic and diluted earnings (loss) per common share for the years ended
December 31, 1999, 1998 and 1997.
For the years ended December 31, 1999 and 1997, 10,979,000 and 917,000
options, respectively, were excluded from the calculations, as their effect
would have been antidilutive. For the year ended December 31, 1998, all
dilutive securities were excluded from the calculation of diluted loss per
share, as their effect would have been antidulutive.
(in thousands, except per share data) Year ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Net income (loss) $55,322 ($26,564) $132,704
================================================================================
Weighted-average shares outstanding:
Weighted-average shares outstanding - Basic 70,397 69,463 68,407
Dilutive securities 817 3,291
- --------------------------------------------------------------------------------
Weighted-average shares outstanding - Diluted 71,214 69,463 71,698
================================================================================
Earnings (loss) per common share:
Basic $ 0.79 ($ 0.38) $ 1.94
Diluted $ 0.78 ($ 0.38) $ 1.85
- --------------------------------------------------------------------------------
<PAGE>
NOTE 8
STOCK OPTIONS AND RIGHTS
- --------------------------------------------------------------------------------
The Company had the following fixed stock option plans, under which shares
were available for grant at December 31, 1999: the 1991 Stock Incentive Plan
(the "1991 Plan"), the 1995 Employee Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan"), the 1998 Stock Incentive Plan
(the "1998 Plan"), the Promotion, Marketing and Endorsement Stock Incentive
Plan (the "Promotion Plan") and the Non-Employee Directors Stock Option Plan
(the "Directors Plan").
The 1991 Plan, the 1996 Plan and the 1998 Plan permit the granting of
options or other stock awards to the Company's officers, employees and
consultants. Under the 1991 Plan, option prices may be less than the market
value at the date of grant, while under the 1996 Plan and the 1998 Plan
options may not be granted at option prices that are less than fair market
value at the date of grant. The 1995 Plan permits the granting of options or
other stock awards to only employees and consultants of the Company at option
prices that may be less than market value at the date of grant. The 1995 Plan
was amended in 1999 to increase the maximum number of shares of Common Stock
to be issued upon exercise of an option to 7,100,000 shares.
During 1996 and 1995, the Company granted options to purchase shares to
two key officers, under separate plans, in conjunction with terms of their
initial employment (the "Key Officer Plans"). The 1990 Amended and Restated
Stock Option Plan (the "1990 Plan") permitted the granting of options to
officers, employees and consultants. No shares are available for grant under
the Key Officer Plans or the 1990 Plan.
Under the Promotion Plan, shares of Common Stock may be granted in the
form of options or other stock awards to golf professionals and other
endorsers at prices that may be less than the market value of the stock at
the grant date. The Directors Plan permits the granting of options to
purchase shares of Common Stock to Directors of the Company who are not
employees, at prices based on a non-discretionary formula, which may not be
less than the market value of the stock at the date of grant.
The following table presents shares authorized, available for future grant
and outstanding under each of the Company's plans as of December 31, 1999:
(in thousands)
Plan Authorized Available Outstanding
- --------------------------------------------------------------------------------
1990 Plan 4,920 100
1991 Plan 10,000 188 2,693
Promotion Plan 3,560 879 1,006
1995 Plan 7,100 1,647 5,249
1996 Plan 6,000 575 5,395
1998 Plan 500 500
Key Officer Plans 1,100 820
Directors Plan 840 64 484
- --------------------------------------------------------------------------------
Total 34,020 3,853 15,747
================================================================================
Under the Company's stock option plans, outstanding options vest over
periods ranging from zero to five years from the grant date and expire up to
ten years after the grant date.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes stock option transactions for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
1999 1998 1997
-----------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 13,637 $22.62 11,257 $22.41 10,800 $15.03
Granted 4,012 $11.30 4,020 $25.04 3,406 $33.79
Exercised (851) $ 6.40 (441) $10.16 (2,877) $ 7.81
Canceled (1,051) $24.95 (1,199) $34.86 (72) $28.81
-----------------------------------------------------------------------------------------------------
Outstanding at end of year 15,747 $20.46 13,637 $22.62 11,257 $22.41
Options exercisable at end of year 11,066 $18.64 6,039 $17.78 3,453 $12.17
-----------------------------------------------------------------------------------------------------
Price range of outstanding options $0.44-$40.00 $0.44-$40 $0.44-$40.00
=====================================================================================================
</TABLE>
The following tables summarize additional information about outstanding
stock options at December 31, 1999 and options and other stock awards granted
during 1999:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Number Remaining Weighted- Average
Range of Outstanding Contractual Average Number Exercise Price
Exercise Prices (in thousands) Life-Years Exercise Price Exercisable (in thousands)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0 - $10 762 2.21 $ 3.17 742 $ 3.01
$10 - $15 5,294 3.92 $11.54 4,841 $10.54
$15 - $25 2,642 4.75 $18.52 1,643 $18.75
$25 - $40 7,049 5.41 $29.75 3,840 $30.57
- ----------------------------------------------------------------------------------------
$0 - $40 15,747 4.64 $20.46 11,066 $18.64
========================================================================================
</TABLE>
OPTIONS AND OTHER STOCK AWARDS GRANTED DURING 1999:
Weighted-
Number Average
(in thousands) Exercise Price
- -----------------------------------------------------------------------------
Exercise price = market value 3,921 $ 11.16
Exercise price (greater than) market value 80 $ 18.88
Exercise price (less than) market value 11 $ 8.56
- -----------------------------------------------------------------------------
4,012 $ 11.30
=============================================================================
<PAGE>
During 1999, the Company, at its discretion, extended the expiration terms
of 1,532,000 options held by certain employees and officers. At the time of
modification, the exercise prices of the options were in excess of the then-
current market price and accordingly this action did not result in
compensation expense for the Company.
During 1998, the Company modified certain terms of 720,000 options held by
directors, certain officers and employees. These modifications, which largely
resulted from the Company's restructuring plan, included acceleration of
vesting and extension of expiration terms at the Company's discretion. At the
time of modification, the exercise prices of the options were in excess of
the then- current market price and accordingly this action did not result in
compensation expense for the Company.
Also during 1998, the Company canceled 150,000 options held by
non-employees with option prices in excess of the then-current market price
of the Company's stock. The Company then reissued an equivalent number of
options to these non- employees at the then-current market price and extended
certain expiration terms, and recorded the related compensation expense of
$71,000. An additional $195,000 was recorded in unearned compensation, and is
being amortized over the remaining vesting periods.
RIGHTS
The Company has granted officers, consultants, and employees rights to
receive an aggregate of 826,800 shares of Common Stock for services or other
consideration. During 1998, 80,000 rights were exercised while none were
granted. No rights were granted or exercised during 1999 or 1997. At December
31, 1999, no rights to receive shares of Common Stock remained outstanding.
The Company has a plan to protect shareholders' rights in the event of a
proposed takeover of the Company. Under the plan, each share of the Company's
outstanding Common Stock carries one right to purchase one one-thousandth of
a share of the Company's Series "A" Junior Participating Preferred Stock (the
"Right"). The Right entitles the holder, under certain circumstances, to
purchase Common Stock of Callaway Golf Company or of the acquiring company at
a substantially discounted price ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15% or more of the
Company's outstanding Common Stock. The Rights are redeemable by the Company
at $.01 per Right and expire in 2005.
RESTRICTED COMMON STOCK
During 1998, the Company granted 130,000 shares of Restricted Common Stock to
26 officers of the Company. Of these shares, 41,250 shares have been canceled
due to the service requirement not being met. The shares, which are
restricted as to sale or transfer until vesting, will vest on January 1,
2003. The related net compensation expense of $2,751,000 is being recognized
ratably over the vesting period, based on the difference between the exercise
price and market value of the stock on the measurement date.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") whereby eligible
employees may purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or the last day
of each six month exercise period. Employees may authorize the Company to
withhold compensation during any offering period, subject to certain
limitations. During 1997, the ESPP was amended to increase the maximum number
of shares of the Company's Common Stock that employees may acquire under this
plan to 1,500,000 shares. During 1999, 1998 and 1997, the ESPP purchased
approximately 378,000, 386,000 and 372,000 shares, respectively, of the
Company's Common Stock. As of December 31, 1999, 195,000 shares were reserved
for future issuance and will be purchased on the January 31, 2000 exercise
period, resulting in the termination of the ESPP.
In May 1999, the Company's shareholders approved a new ESPP(the "1999
ESPP") with substantially the same terms as the ESPP. There are 2,000,000
shares reserved for issuance under the 1999 ESPP. This plan will be effective
February 1, 2000 upon the termination of the ESPP.
COMPENSATION EXPENSE
During 1999, 1998, and 1997, the Company recorded $1,370,000, $2,321,000 and
$2,041,000, respectively, in compensation expense for Restricted Common Stock
and certain options to purchase shares of Common Stock granted to employees,
officers and consultants of the Company. The valuation of options granted to
non-employees is estimated using the Black-Scholes option pricing model.
Unearned compensation has been charged for the value of options granted to
both employees and non-employees on the measurement date based on the
valuation methods described above. These amounts are amortized over the
vesting period. The unamortized portion of unearned compensation is shown as
a reduction of shareholders' equity in the accompanying consolidated balance
sheet.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA DISCLOSURES
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for employee awards under these plans, the
Company's net income (loss) and earnings (loss) per share would be changed to
the pro forma amounts indicated below:
(in thousands, except Year ended December 31,
per share data) 1999 1998 1997
------------------------------------------------------------------------------
Net income (loss):
As reported $ 55,322 ($26,564) $ 132,704
Pro forma $ 34,422 ($46,847) $ 124,978
Earnings (loss) per
common share:
As reported
Basic $ 0.79 ($0.38) $ 1.94
Diluted $ 0.78 ($0.38) $ 1.85
Pro forma
Basic $ 0.49 ($0.67) $ 1.83
Diluted $ 0.48 ($0.67) $ 1.77
==============================================================================
The pro forma amounts reflected above may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense as the options vest and additional options may be granted in future
years. The fair value of employee stock options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for the years ended December 31, 1999, 1998, and 1997,
respectively:
Year ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
Dividend yield 1.4% 1.9% 0.9%
Expected volatility 45.6% 42.0% 31.5%
Risk free interest rates 5.36%-6.24% 4.66-4.72% 5.64-5.89%
Expected lives 3-4 years 3-6 years 3-6 years
==============================================================================
The weighted-average grant-date fair value of options granted during 1999
was $3.57 per share. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the
fair value estimates, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of grants
under the Company's employee stock-based compensation plans.
NOTE 9
EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
The Company has a voluntary deferred compensation plan under Section 401(k)
of the Internal Revenue Code (the "401(k) Plan") for all employees who
satisfy the age and service requirements under the 401(k) Plan. Each
participant may elect to contribute up to 10% of annual compensation, up to
the maximum permitted under federal law, and the Company is obligated to
contribute annually an amount equal to 100% of the participant's contribution
up to 6% of that participant's annual compensation. Employees contributed to
the 401(k) Plan $5,486,000, $5,601,000 and $5,384,000 in 1999, 1998 and 1997,
respectively. In accordance with the provisions of the 401(k) Plan, the
Company matched employee contributions in the amount of $4,510,000,
$4,673,000 and $4,495,000 during 1999, 1998 and 1997, respectively.
Additionally, the Company can make discretionary contributions based on the
profitability of the Company. For the year ended December 31, 1999, the
Company recorded compensation expense for discretionary contributions of
$3,605,000. No discretionary contributions were made for the years ended
December 31, 1998 and 1997.
The Company also has an unfunded, nonqualified deferred compensation plan.
The plan allows officers, certain other employees and directors of the
Company to defer all or part of their compensation, to be paid to the
participants or their designated beneficiaries upon retirement, death or
separation from the Company. For the years ended December 31, 1999, 1998 and
1997, the total participant deferrals, which are reflected in long-term
liabilities, were $997,000, $908,000 and $1,166,000, respectively. Included
in other income during 1999 were net proceeds from an insurance policy
related to the deferred compensation plan of $3,622,000.
NOTE 10
INCOME TAXES
- --------------------------------------------------------------------------------
The Company's income (loss) before income tax provision (benefit) was subject
to taxes in the following jurisdictions for the following periods:
(in thousands) Year ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
Domestic $ 75,799 ($ 34,555) $ 212,453
Foreign 9,698 (4,344) 1,312
------------------------------------------------------------------------------
$ 85,497 ($ 38,899) $ 213,765
==============================================================================
<PAGE>
The provision (benefit) for income taxes is as follows:
(in thousands) Year ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax provision (benefit):
United States $ 14,779 $ 21,345 $ 66,462
State 2,774 2,296 12,419
Foreign 3,044 250 1,150
Deferred tax expense (benefit):
United States 8,956 (31,173) 1,042
State 1,162 (4,847) 50
Foreign (540) (206) (62)
- --------------------------------------------------------------------------------
Income tax provision (benefit) $ 30,175 ($12,335) $ 81,061
================================================================================
During 1999, 1998 and 1997, the Company recognized certain tax benefits
related to stock option plans in the amount of $2,377,000, $3,068,000 and
$29,786,000 respectively. Such benefits were recorded as a reduction of
income taxes payable and an increase in additional paid-in capital.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
(in thousands) December 31,
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserves and allowances $ 28,052 $ 36,229
Depreciation and amortization 16,601 7,963
Deferred compensation 4,678 3,100
Effect of inventory overhead adjustment 1,977 4,062
Compensatory stock options and rights 2,573 2,327
Foreign net operating loss carryforwards 798 1,074
Other 2,773 3,979
Restructuring charges
Long-lived asset impairment 1,740 1,755
Rental/lease arrangements 557 5,472
Estimated losses on assets held
for disposal 4,335
Capital loss carryforward 829 685
Other 52
Tax credit carryforwards 2,827
- --------------------------------------------------------------------------------
Total deferred tax assets 63,405 71,033
Valuation allowance for deferred
tax assets (4,190) (1,759)
- --------------------------------------------------------------------------------
Deferred tax assets, net of valuation
allowance 59,215 69,274
Deferred tax liabilities:
State taxes, net of federal income
tax benefit (2,128) (2,608)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 57,087 $ 66,666
===============================================================================
At December 31, 1999, the Company had tax credit carry-forwards primarily
relating to state investment tax credits which have expiration dates
beginning with December 31, 2006.
A valuation allowance has been established due to the uncertainty of
realizing certain tax credits, carryforwards, and a portion of other deferred
tax assets. The valuation allowance was increased by $2,431,000 during 1999,
of which $2,073,000 was attributable to state research and investment tax
credits. Based on management's assessment, it is more likely than not that
all the net deferred tax assets will be realized through future earnings or
implementation of tax planning strategies.
A reconciliation of income taxes computed by applying the statutory U.S.
income tax rate to the Company's income (loss) before income taxes to the
income tax provision (benefit) is as follows:
(in thousands) Year ended December 31,
1999 1998 1997
------------------------------------------------------------------------------
Amounts computed at
statutory U.S. tax rate $ 29,924 ($13,615) $ 74,816
State income taxes, net
U.S. tax benefit 3,046 (1,501) 8,105
State tax credits, net of
U.S. tax benefit (2,075)
Nondeductible foreign losses (476) 1,226
Expenses with no tax benefit 814 1,064
Nondeductible capital losses 130 588
Foreign sales corporation
tax benefits (1,471) (236) (2,519)
Nontaxable insurance proceeds (1,408)
Change in tax valuation allowance 2,431
Other (740) 139 659
------------------------------------------------------------------------------
Income tax provision (benefit) $ 30,175 ($12,335) $ 81,061
==============================================================================
U.S. tax return examinations have been completed for the years through
1994. Management believes adequate provisions for income tax have been
recorded for all years.
NOTE 11
COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
The Company and its subsidiaries, incident to their business activities, are
parties to a number of legal proceedings, lawsuits and other claims. Such
matters are subject to many uncertainties and outcomes are not predictable
with assurance. Consequently, management is unable to ascertain the ultimate
aggregate amount of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these matters as of
December 31, 1999. However, management believes that the final resolution of
these matters, individually and in the aggregate, will not have
<PAGE>
a material adverse effect upon the Company's annual consolidated financial
position, results of operations or cash flows.
The Company leases certain warehouse, distribution and office facilities,
as well as office and manufacturing equipment under operating leases. Lease
terms range from one to 10 years with options to renew at varying terms.
Callaway Golf Ball Company has guaranteed the residual value of equipment
leased pursuant to an operating lease which is subject to renewal. The
residual value guarantee, which approximates estimated fair market value of
the equipment at each option period, is reduced over time. Commitments for
minimum lease payments under non- cancelable operating leases having initial
or remaining non-cancelable terms in excess of one year as of December 31,
1999 are as follows:
(in thousands)
------------------------------------------------------------------------------
2000 $11,128
2001 9,755
2002 6,612
2003 1,972
2004 1,904
Thereafter 7,926
------------------------------------------------------------------------------
$39,297
==============================================================================
Future minimum lease payments have not been reduced by future minimum
sublease rentals of $2,207,000 under an operating lease. At December 31,
1999, the Company is contingently liable for $6,563,000 through February 2003
under an operating lease that was assigned to a third party (Note 12 ). Rent
expense for the years ended December 31, 1999, 1998 and 1997 was $2,315,000,
$17,654,000 and $1,760,000, respectively. Rent expense for 1999 does not
include a credit of $6,076,000 related to the reversal of a restructuring
reserve for excess lease costs (Note 12). Rent expense for 1998 includes
$13,466,000 in excess lease costs related to the Company's restructuring
activities (Note 12). The Company had no capital leases at December 31, 1999.
NOTE 12
RESTRUCTURING
- --------------------------------------------------------------------------------
During the fourth quarter of 1998, the Company recorded a restructuring
charge of $54,235,000 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, into the
operations of the Company while maintaining the distinct and separate
Odyssey(R) brand; the discontinuation, transfer or suspension of certain
initiatives not directly associated with the Company's core business, such as
the Company's involvement with interactive golf sites, golf book publishing,
new player development and a golf venue in Las Vegas; and the re-sizing of
the Company's core business to reflect current and expected business
conditions. These initiatives were completed during 1999, with the exception
of cash outlays related to the assignment of a lease obligation for a
facility in New York City that will continue through July 2000. The
restructuring charges (shown below in tabular format) primarily related to:
1) the elimination of job responsibilities, resulting in costs incurred for
employee severance; 2) the decision to exit certain non-core business
activities, resulting in losses on disposition of the Company's 80% interest
in CGMV (Note 14), a loss on the sale of the business of All-American (Note
14), 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.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31,
1998, the Company had reduced its non-temporary work force by approximately
750 positions. Although substantially all reductions occurred prior to
December 31, 1998, a small number of reductions occurred in the first quarter
of 1999.
During the restructuring, the Company consolidated its operations and sold
certain of its buildings, which housed a portion of its manufacturing and
research and development activities. Other write-downs were recorded during
1998 for idle assets, assets whose manner of use had changed significantly
and equipment replaced as a result of capital improvements. The impaired
assets included buildings, building improvements, and machinery and equipment
used in certain of the Company's manufacturing and research and development
activities.
The projected future cash flows from these assets were less than the
carrying values of the assets. The carrying values of the assets held for
sale and the assets to be held and used were reduced to their estimated fair
values based on independent appraisals of selling values and values of
similar assets sold, less costs to sell. In 1998, the Company recorded losses
from impairment of assets of $12,634,000, which were recorded as
restructuring costs. The Company completed the dispositions in 1999. At
December 31, 1998, subsequent to the write-down for impairments, the carrying
amount of the assets held for disposal and assets to be held and used was
$13,678,000 and $4,582,000, respectively. The Company continued to depreciate
the assets that were held and used but did not further depreciate the assets
held for disposition. The effect on depreciation for the year ended December
31, 1999 did not materially impact the Company's results of operations and
management does not expect this effect to materially impact future results of
operations.
<PAGE>
Details of the one-time charge are as follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
Cash/ One-Time Balance Balance
Non-Cash Charge Activity at 12/31/98 Activity(1) at 12/31/99
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $ 3,191
Severance packages Cash 11,603 8,412 3,191 3,191
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $15,394 $ 1,379
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,731(2)
Excess lease costs Cash 12,660 146 12,514 11,135 1,379
Contract cancellation fees Cash 2,700 1,504 1,196 1,196
Other Cash 356 24 332 332
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $10,937
Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 9,634(3)
Excess lease costs Cash 806 4 802 802(4)
Other Cash 613 112 501 501
==================================================================================================================================
</TABLE>
(1) Includes reversal of reserve totaling $8,609,000, as actual amounts
differed from estimates. Significant reversals are noted below in (2)
through(4)
(2) Includes reversal of $6,076,000 of reserve due to the assignment of lease
obligation at terms significantly more favorable than estimated at the
establishment of the reserve.
(3) Includes reversal of $1,470,000 of reserve related to disposition of two
buildings at higher sales prices than estimated. (4) Includes reversal of
$491,000 of reserve due to the sublease of a facility at terms more
favorable than estimated at the establishment of the reserve.
During 1999, the Company incurred charges of $1,295,000 on the disposition
of building improvements eliminated during the consolidation of manufacturing
operations, as well as other charges of $671,000. These charges did not meet
the criteria for accrual in 1998. Additionally, the Company incurred charges
of $749,000 related to asset dispositions and other restructuring activities
for which reserves were not established in 1998. Future cash outlays are
anticipated to be completed by July 2000.
NOTE 13
LITIGATION SETTLEMENT
- --------------------------------------------------------------------------------
In 1997, the Company settled a lawsuit brought against it and certain
officers of the Company by a former officer of the Company with the payment
of $12,000,000.
The Company filed suit against certain of its insurers and an insurance
agent seeking coverage for the costs of defending and settling the above
lawsuit (the "coverage litigation"). The insurers and the insurance agent
settled with the Company in 1998 for an amount that was not material. This
settlement was recorded in general and administrative expenses as a reduction
of legal fees.
NOTE 14
AQUISITIONS AND REORGANIZATIONS
- --------------------------------------------------------------------------------
During 1999, the Company acquired distribution rights and substantially all
of the assets from its distributor in Ireland for $810,000. Also in 1999, the
Company merged its subsidiary, Callaway Golf Europe, S.A., with another of
its subsidiaries, Callaway Golf Europe, Ltd. and now operates in France
through a satellite office. During 1998, the Company acquired distribution
rights and substantially all of the assets from its distributors in Korea,
Canada, France, Belgium, Norway and Denmark, as well as the remaining 20%
interest in Callaway Golf Trading GmbH (Note 16), the results of which are
consolidated in the results of Callaway Golf (Germany) GmbH. The aggregate
purchase price for these transactions was $27,229,000, excluding the
assumption and subsequent retirement of short-term debt
<PAGE>
obligations of $10,373,000. The excess of the purchase price over net assets
acquired of $20,935,000 was allocated to goodwill and is being amortized over
estimated useful lives of three to 10 years. These acquisitions, along with
the acquisition of the remaining 80% interest in All-American (discussed
below) are not considered significant business combinations. Accordingly, pro
forma financial information is not presented.
In May 1998, the Company acquired for $4,526,000 the remaining 80%
interest in All-American, which operates a nine-hole golf course, performance
center, training facility and driving range located in Las Vegas, Nevada. On
December 30, 1998, as part of its business plan to discontinue certain
non-core business activities, the Company sold the business of All-American
in exchange for barter trade credits, which were recorded at the fair market
value of the asset exchanged. The Company recorded a loss on the disposition
of this business of $10,341,000 in December 1998 (Note 12).
On August 8, 1997, the Company consummated its acquisition of
substantially all of the assets and certain liabilities of Odyssey Sports,
Inc., by its wholly-owned subsidiary, Odyssey, subject to certain adjustments
as of the time of closing. Odyssey's results of operations have been included
in the Company's consolidated results of operations since August 8, 1997.
Odyssey manufactured and marketed the Odyssey(R) line of putters and wedges
with Stronomic(R) and Lyconite(R) face inserts. During 1998, as part of its
restructuring plan, the operations of Odyssey were consolidated into that of
the Company, while maintaining the distinct and separate Odyssey(R) brand. In
1999, Odyssey was dissolved as a corporate entity and as a subsidiary.
The cost to acquire substantially all of the assets and certain
liabilities of Odyssey Sports, Inc., including professional fees directly
related to the acquisition, was approximately $129,256,000 and has been
accounted for using the purchase method of accounting. Amounts allocated to
trade name, trademark, trade dress and goodwill are being amortized on the
straight-line basis over 40 years. The amounts allocated to the process
patent and covenant not to compete are being amortized on the straight- line
basis over 16 and three years, respectively.
The following unaudited pro forma net sales, net income and earnings per
share data for the year ended December 31, 1997 are based on the respective
historical financial statements of the Company and Odyssey Sports, Inc. The
pro forma data presented for the year ended December 31, 1997 combines the
results of operations of the Company for the year ended December 31, 1997
with the results of operations of Odyssey Sports, Inc. for the ten months
ended August 7, 1997 and the results of Odyssey for the two months ended
September 30, 1997 and assumes that the acquisition of substantially all of
the assets and certain liabilities of Odyssey Sports, Inc. occurred on
January 1, 1997.
The pro forma financial data presented are not necessarily indicative of
the Company's results of operations that might have occurred had the
transaction been completed at the beginning of the period specified, and do
not purport to represent what the Company's consolidated results of
operations might be for any future period.
(in thousands, except per share data) Year Ended
December 31,
1997
(unaudited)
----------------------------------------------------------------------
Net sales $884,840
----------------------------------------------------------------------
Net income $134,512
----------------------------------------------------------------------
Earnings per common share:
Basic $ 1.97
Diluted $ 1.88
======================================================================
<PAGE>
NOTE 15
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 sales of related accessories.
The Golf Balls segment consists of golf balls that are designed and
manufactured, and will be marketed and distributed by the Company's
wholly-owned subsidiary, Callaway Golf Ball Company. All Other segments,
including interactive golf sites, golf book publishing, new player
development and a driving range venture, are aggregated as they do not meet
requirements for separate disclosure set forth in SFAS No. 131. In accordance
with its restructuring plan, the Company is no longer pursuing these
initiatives (Note 12). There are no significant intersegment transactions.
The table below contains information utilized by management to evaluate its
operating segments.
<TABLE>
<CAPTION>
(in thousands)
1999 Golf Clubs Golf Balls All Other Consolidated
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 714,471 $ 714,471
Income (loss) before tax 123,922 ($ 38,425) 85,497
Interest income 5,463 5,463
Interest expense (2,222) (1,372) (3,594)
Depreciation and amortization 36,151 3,726 39,877
Additions to long-lived assets 10,210 46,912(1) 57,122
=================================================================================================================
1998 Golf Clubs Golf Balls All Other Consolidated
-----------------------------------------------------------------------------------------------------------------
Net sales $ 697,621 $ 697,621
Income (loss) before tax 9,182 ($ 22,426) ($ 25,655) (38,899)
Interest income 1,564 7 1,571
Interest expense (2,252) (419) (2,671)
Depreciation and amortization 34,121 1,072 692 35,885
Additions to long-lived assets 39,854 47,721(1) 1,408 88,983
=================================================================================================================
1997 Golf Clubs Golf Balls All Other Consolidated
-----------------------------------------------------------------------------------------------------------------
Net sales $ 842,927 $ 842,927
Income (loss) before tax 222,771 ($ 9,013) $ 7 213,765
Interest income 4,703 4,703
Interest expense (10) (10)
Depreciation and amortization 19,219 84 105 19,408
Additions to long-lived assets 166,461 10,263 823 177,547
=================================================================================================================
</TABLE>
(1) Includes an aggregate of $50,000,000 converted to an operating lease in
1999 (Note 4).
The Company markets its products domestically and internationally, with
its principal international markets being Asia and Europe. The table below
contains information about the geographical areas in which the Company
operates. Revenues are attributed to the location to which the product was
shipped. Long-lived assets are based on location of domicile.
The Company, through a distribution agreement, had appointed Sumitomo as
the sole distributor of Callaway Golf(R) clubs in Japan. The distribution
agreement, which began in February 1993 and ended on December 31, 1999,
required Sumitomo to purchase specified minimum quantities. 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. As a result of this transition agreement, the
Company recorded a net charge of $8.6 million in the fourth quarter of 1999
for buying certain current inventory, payments for non-current inventory and
other transition expenses, including foreign currency transaction losses.
Odyssey(R) brand products are sold through the Company's wholly-owned
Japanese subsidiary, Callaway Golf K.K., and beginning January 1, 2000,
Callaway Golf(R) brand products also will be sold through this subsidiary.
<PAGE>
(In thousands)
1999 Sales Long-Lived Assets
------------------------------------------------------------------------------
United States $414,136 $241,241
Europe 115,673 14,027
Japan 55,928 2,634
Rest of Asia 73,121 974
Other foreign countries 55,613 3,481
------------------------------------------------------------------------------
Total $714,471 $262,357
==============================================================================
1998 Sales Long-Lived Assets
------------------------------------------------------------------------------
United States $437,627 $277,611
Europe 116,354 17,789
Japan 61,460 857
Rest of Asia 34,189 1,194
Other foreign countries 47,991 3,122
------------------------------------------------------------------------------
Total $697,621 $300,573
==============================================================================
1997 Sales Long-Lived Assets
------------------------------------------------------------------------------
United States $547,256 $250,548
Europe 108,659 4,035
Japan 84,634 61
Rest of Asia 54,029
Other foreign countries 48,349
------------------------------------------------------------------------------
Total $842,927 $254,644
==============================================================================
NOTE 16
TRANSACTIONS WITH RELATED PARTIES
- --------------------------------------------------------------------------------
During 1998, the Company entered into an agreement with Callaway Editions,
Inc. to form CGMV, a limited liability company that was owned 80% by the
Company and 20% by Callaway Editions, Inc. ("Callaway Editions"). Callaway
Editions is a publishing and media company which is owned 9% by Ely Callaway,
Chairman and Chief Executive Officer of the Company, and 81% by his son,
Nicholas Callaway. CGMV was formed to produce print and other media products
that relate to the game of golf. Pursuant to the agreement, the Company
agreed to loan CGMV up to $20,000,000 for working capital, subject to CGMV's
achievement of certain milestones to the satisfaction of the Company in its
sole discretion. Also pursuant to the agreement, CGMV was obligated to pay an
annual management fee of $450,000 to Callaway Editions. In conjunction with
the Company's restructuring plan, the Company committed to sell or assign its
interest in CGMV to Callaway Editions. Accordingly, the Company recorded a
charge in operations to December 1998 based on the December 31, 1998 book
value of CGMV (Note 12).
During 1999, the Company forgave the existing loan balance from CGMV of
approximately $2,142,000, sold its interest to Callaway Editions for a
nominal amount and paid $1,000,000 as consideration for release from its
obligation to loan CGMV up to $20,000,000. These transactions did not result
in a charge in 1999, as they were adequately accrued in the 1998
restructuring reserve (Note 12).
In December 1998, the Company purchased the remaining 20% interest in
Callaway Golf Trading GmbH, the Company's former German distributor, for
$6,766,000. The purchase price was in the form of a note payable bearing
interest at 7%, due in June 1999 to the seller, who is an officer of a
wholly-owned subsidiary of Company. The note payable was included in accounts
payable and accrued expenses at December 31, 1998 and was paid in February
1999.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO APPEARS HERE]
To the Board of Directors and Shareholders of Callaway Golf Company:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders'equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 26, 2000
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) Fiscal Year 1999 Quarters
1st 2nd 3rd 4th Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $185,744 $229,708 $183,335 $115,684 $714,471
Gross profit $ 83,520 $108,664 $ 89,896 $ 55,986 $338,066
Net income $ 12,823 $ 24,771 $ 17,572 $ 156 $ 55,322
Earnings per common share*
Basic $ 0.18 $ 0.35 $ 0.25 $ 0.00 $ 0.79
Diluted $ 0.18 $ 0.35 $ 0.25 $ 0.00 $ 0.78
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998 Quarters
1st 2nd 3rd 4th Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 176,908 $ 233,251 $ 172,944 $ 114,518 $ 697,621
Gross profit $ 83,705 $ 108,790 $ 83,085 $ 20,434 $ 296,014
Net income(loss) $ 11,160 $ 21,137 $ 5,836 ($ 64,697) ($ 26,564)
Earnings(loss) per common share*
Basic $ 0.16 $ 0.30 $ 0.08 ($ 0.93) ($ 0.38)
Diluted $ 0.16 $ 0.30 $ 0.08 ($ 0.93) ($ 0.38)
==============================================================================================
</TABLE>
* Earnings per share is computed individually for each of the quarters
presented; therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY."
As of March 6, 2000, the approximate number of holders of record of the
Company's Common Stock was 9,415.
STOCK PRICE INFORMATION
Year ended December 31,
1999 1998
------------------------------------------------------------------------------
Period: High Low Dividend High Low Dividend
------------------------------------------------------------------------------
First Quarter $11.44 $10.00 $0.07 $33.25 $26.50 $0.07
Second Quarter $16.69 $12.19 $0.07 $29.44 $17.94 $0.07
Third Quarter $14.63 $ 9.31 $0.07 $20.50 $ 9.56 $0.07
Fourth Quarter $18.00 $11.69 $0.07 $13.56 $ 9.81 $0.07
==============================================================================
<PAGE>
EXHIBIT 21.1
------------
CALLAWAY GOLF COMPANY
SUBSIDIARIES
All-American Golf LLC
Callaway (Barbados) Foreign Sales Corporation
Callaway Golf (Germany) GmbH
Callaway Golf Ball Company
Callaway Golf Canada Ltd.
Callaway Golf Europe Ltd.
Callaway Golf K.K.
Callaway Golf Korea Ltd.
Callaway Golf Sales Company
Callaway Golf Shell Company
CGV, Inc.
Golf Funding Corporation
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-77024) and
in the Registration Statements on Form S-8 (No. 33-85692, No. 33-50564, No. 33-
56756, No. 33-67160, No. 33-73680, No. 33-98750, No. 33-92302, No. 333-242, No.
333-5719, No. 333-5721, No. 333-24207, No. 333-27089, No. 333-27091, No. 333-
39093, No. 333-39095, No. 333-61889, No. 333-95601 and No. 333-95603) of
Callaway Golf Company of our report dated January 26, 2000 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated January 26, 2000 relating to the
financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Diego, California
March 28, 2000
<PAGE>
Exhibit 24.1
------------
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, William C. Baker, a member of
the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ WILLIAM C. BAKER
-----------------------------
William C. Baker
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, Vernon E. Jordan, Jr., a member
of the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ VERNON E. JORDAN, JR.
-----------------------------
Vernon E. Jordan, Jr.
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, Yotaro Kobayashi, a member of the
Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ YOTARO KOBAYASHI
-----------------------------
Yotaro Kobayashi
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, Aulana L. Peters, a member of
the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ AULANA L. PETERS
-----------------------------
Aulana L. Peters
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, Richard L. Rosenfield, a member
of the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ RICHARD L. ROSENFIELD
-----------------------------
Richard L. Rosenfield
LIMITED POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that I, William A. Schreyer, a member
of the Board of Directors of Callaway Golf Company, a Delaware corporation (the
"Company"), with its principal executive offices in Carlsbad, California, do
hereby constitute, designate and appoint each of Charles J. Yash and Steven C.
McCracken, each of whom are executive officers of the Company, as my true and
lawful attorneys-in-fact, each with power of substitution, with full power to
act without the other and on behalf of and as attorney for me, for the purpose
of executing and filing with the Securities and Exchange Commission the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, and
any and all amendments thereto, and to do all such other acts and execute all
such other instruments which said attorney may deem necessary or desirable in
connection therewith.
I have executed this Limited Power of Attorney as of February 17, 2000.
/s/ WILLIAM A. SCHREYER
-----------------------------
William A. Schreyer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the Callaway
Golf Company Consolidated Balance Sheet and Consolidated Statement of Operations
at December 31, 1999 and for the year then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 112,602
<SECURITIES> 0
<RECEIVABLES> 59,513
<ALLOWANCES> 5,291
<INVENTORY> 112,932
<CURRENT-ASSETS> 310,472
<PP&E> 243,290
<DEPRECIATION> 101,076
<TOTAL-ASSETS> 616,783
<CURRENT-LIABILITIES> 105,274
<BONDS> 0
0
0
<COMMON> 763
<OTHER-SE> 499,171
<TOTAL-LIABILITY-AND-EQUITY> 616,783
<SALES> 714,471
<TOTAL-REVENUES> 714,471
<CGS> 376,405
<TOTAL-COSTS> 376,405
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 654
<INTEREST-EXPENSE> 3,594
<INCOME-PRETAX> 85,497
<INCOME-TAX> 30,175
<INCOME-CONTINUING> 55,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,322
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.78
</TABLE>
