-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mm2kHRp6KV3xmzZsgT6fgaXd1e7B1SoFohhLzMWWFGlC1Qk7BNNNCK+s61yducVn nhWy640oIuvhI9J/A7NLQQ== 0001072993-99-000121.txt : 19990518 0001072993-99-000121.hdr.sgml : 19990518 ACCESSION NUMBER: 0001072993-99-000121 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALLAWAY GOLF CO /CA CENTRAL INDEX KEY: 0000837465 STANDARD INDUSTRIAL CLASSIFICATION: [3949] IRS NUMBER: 953797580 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10962 FILM NUMBER: 99627933 BUSINESS ADDRESS: STREET 1: 2285 RUTHERFORD RD CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 7609311771 10-Q 1 FOR PERIOD ENDED 3/31/1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-10962 CALLAWAY GOLF COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 95-3797580 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2285 Rutherford Road, Carlsbad, CA 92008-8815 (760) 931-1771 (Address, including zip code and telephone number, including area code, of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]. The number of shares outstanding of the Registrant's Common Stock, $.01 par value, as of April 30, 1999 was 75,543,761. CALLAWAY GOLF COMPANY INDEX Page Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheet at March 31, 1999 and December 31, 1998 3 Consolidated Condensed Statement of Income for the three months ended March 31, 1999 and 1998 4 Consolidated Condensed Statement of Cash Flows for the three months ended March 31, 1999 and 1998 5 Consolidated Condensed Statement of Shareholders' Equity for the three months ended March 31, 1999 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Part II. Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements CALLAWAY GOLF COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (In thousands, except share and per share data)
March 31, December 31, 1999 1998 ============================================================================================================= (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 23,653 $ 45,618 Accounts receivable, net of allowance of $10,271 and $9,939 at March 31, 1999 and December 31, 1998, respectively (Note 4) 65,337 73,466 Inventories, net 120,375 149,192 Deferred taxes 50,267 51,029 Other current assets 8,822 4,301 - ------------------------------------------------------------------------------------------------------------- Total current assets 268,454 323,606 Property, plant and equipment, net 191,238 172,794 Intangible assets, net 125,747 127,779 Other assets 33,844 31,648 - ------------------------------------------------------------------------------------------------------------- $ 619,283 $ 655,827 ============================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 38,366 $ 35,928 Line of credit (Note 3) 70,919 Note payable (Note 3) 25,595 12,971 Accrued employee compensation and benefits 16,334 11,083 Accrued warranty expense 36,855 35,815 Accrued restructuring costs 3,758 7,389 Income taxes payable 16,735 9,903 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 137,643 184,008 Long-term liabilities: Deferred compensation 8,620 7,606 Accrued restructuring costs 10,691 11,117 Commitments and contingencies (Note 6) Shareholders' equity: Preferred Stock, $.01 par value, 3,000,000 shares authorized, none issued and outstanding at March 31, 1999 and December 31, 1998, respectively Common Stock, $.01 par value, 240,000,000 shares authorized, 75,526,661 and 75,095,087 issued and outstanding at March 31, 1999, and December 31, 1998, respectively 755 751 Paid-in capital 260,026 258,015 Unearned compensation (5,088) (5,653) Retained earnings 260,433 252,528 Accumulated other comprehensive income 197 1,780 Less: Grantor Stock Trust (5,300,000 shares) at market (53,994) (54,325) - ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 462,329 453,096 - ------------------------------------------------------------------------------------------------------------- $619,283 $655,827 =============================================================================================================
See accompanying notes to consolidated condensed financial statements 3 CALLAWAY GOLF COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) (In thousands, except per share data)
Three Months Ended March 31, 1999 1998 ========================================================================================================== Net sales $185,744 100% $176,908 100% Cost of goods sold 102,224 55% 93,203 53% - ---------------------------------------------------------------------------------------------------------- Gross profit 83,520 45% 83,705 47% Operating expenses: Selling 31,300 17% 35,792 20% General and administrative 21,728 12% 20,504 12% Research and development 8,454 5% 8,665 5% - ---------------------------------------------------------------------------------------------------------- Income from operations 22,038 12% 18,744 11% Other expense, net (771) (337) - ---------------------------------------------------------------------------------------------------------- Income before income taxes 21,267 11% 18,407 10% Provision for income taxes 8,444 7,247 - ---------------------------------------------------------------------------------------------------------- Net income $12,823 7% $11,160 6% ========================================================================================================== Earnings per common share: Basic $ 0.18 $ 0.16 Diluted $ 0.18 $ 0.16 Common equivalent shares: Basic 69,977 69,184 Diluted 70,565 71,173 Dividends paid per share $ 0.07 $ 0.07
See accompanying notes to consolidated condensed financial statements. 4 CALLAWAY GOLF COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Three months ended March 31, - ------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $12,823 $11,160 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,438 6,829 Loss on disposal of assets 339 2 Non-cash compensation 477 4,298 Tax benefit from exercise of stock options 56 1,531 Deferred taxes 1,114 (1,650) Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable, net 7,741 (22,747) Inventories, net 28,006 (42,508) Other assets (7,968) (8,342) Accounts payable and accrued expenses 4,330 16,034 Accrued employee compensation and benefits 5,292 3,902 Accrued warranty expense 1,036 2,099 Income taxes payable 6,827 6,835 Accrued restructuring costs (3,630) Other liabilities 1,014 499 Accrued restructuring costs - long term (426) - ------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 66,469 (22,058) - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Business acquisitions, net of cash acquired (673) (4,296) Capital expenditures (31,581) (12,104) Sale of assets 5,035 - ------------------------------------------------------------------------------------------------- Net cash used in investing activities (27,219) (16,400) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of Common Stock 2,378 1,927 Dividends paid (4,918) (4,846) Retirement of Common Stock (627) Proceeds from note payable 12,625 Repayment of line of credit (70,919) 30,000 - ------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (60,834) 26,454 - ------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (381) 230 - ------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (21,965) (11,774) Cash and cash equivalents at beginning of period 45,618 26,204 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $23,653 $14,430 =================================================================================================
See accompanying notes to consolidated condensed financial statements. 5 CALLAWAY GOLF COMPANY CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (In thousands)
Accumulated Other Common Stock Paid-in Unearned Retained Comprehensive Comprehensive Shares Amount Capital Compensation Earnings Income GST Total Income ================================================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 75,095 $751 $258,015 $ (5,653) $252,528 $ 1,780 $ (54,325) $453,096 - ---------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options 255 2 663 665 Cancellation of Restricted Common Stock (4) (108) 110 2 Tax benefit from exercise of stock options 56 56 Compensatory stock and stock options 20 455 475 Employee stock purchase plan 181 2 1,711 1,713 Cash dividends (5,289) (5,289) Dividends on shares held by GST 371 371 Adjustment of GST shares to market value (331) 331 Equity adjustment from foreign currency translation (1,583) (1,583) $ (1,583) Net income 12,823 12,823 12,823 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 75,527 $755 $260,026 $ (5,088) $260,433 $ 197 $ (53,994) $462,329 $ 11,240 ==================================================================================================================================
See accompanying notes to consolidated condensed financial statements. 6 CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of presentation --------------------- The accompanying financial information for the three months ended March 31, 1999 and 1998 has been prepared by Callaway Golf Company (the "Company") and has not been audited. These financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed for the year ended December 31, 1998. Interim operating results are not necessarily indicative of operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform with the current period presentation. 2. Inventories ----------- March 31, December 31, 1999 1998 - --------------------------------------------------------------------- (Unaudited) Inventories, net (in thousands): Raw materials $ 83,014 $ 102,352 Work-in-process 2,156 1,820 Finished goods 68,762 81,868 - --------------------------------------------------------------------- 153,932 186,040 Less reserve for obsolescence (33,557) (36,848) - --------------------------------------------------------------------- $ 120,375 $ 149,192 ===================================================================== 7 3. Bank line of credit and note payable ------------------------------------ On February 12, 1999, the Company consummated the amendment of its line of credit to increase the revolving credit facility to $120.0 million (the "Amended Credit Agreement"). The Amended Credit Agreement has a five-year term and is secured by substantially all of the assets of the Company. The Amended Credit Agreement bears interest at the Company's election at the London Interbank Offering Rate ("LIBOR") plus a margin or the higher of the base rate on corporate loans at large U.S. money center commercial banks (prime rate) or the Federal Funds Rate plus 50 basis points. The line of credit requires the Company to maintain certain minimum financial ratios including a fixed charge coverage ratio, as well as other restrictive covenants. As of March 31, 1999, up to $118.2 million of the credit facility remained available for borrowings (including a reduction of $1.8 million for outstanding letters of credit), subject to meeting certain availability requirements under a borrowing base formula and other limitations. Effective as of December 30, 1998, Callaway Golf Ball Company, a wholly-owned subsidiary of the Company, entered into a master lease agreement for the acquisition and lease of approximately $56.0 million of machinery and equipment. This lease program is expected to commence during the second quarter of 1999 and includes an interim finance agreement (the "Finance Agreement"). The Finance Agreement provides pre-lease financing advances for the acquisition and installation costs of the aforementioned machinery and equipment. The Finance Agreement bears interest at LIBOR plus a margin and is secured by the underlying machinery and equipment and a corporate guarantee from the Company. As of March 31, 1999, $25.6 million was outstanding under this facility. 4. Accounts receivable securitization ---------------------------------- The Company's wholly-owned subsidiary, Callaway Golf Sales Company, sells trade receivables on an ongoing basis to its wholly-owned subsidiary, Golf Funding Corporation ("Golf Funding"). Pursuant to an agreement with a securitization company (the "Accounts Receivable Facility"), Golf Funding, in turn, sells such receivables to the securitization company on an ongoing basis, which yields proceeds of up to $80.0 million at any point in time. Golf Funding's sole business is the purchase of trade receivables from Callaway Golf Sales Company. Golf Funding is a separate corporate entity with its own separate creditors, which in the event of its liquidation will be entitled to be satisfied out of Golf Funding's assets prior to any value in Golf Funding becoming available to the Company. The Accounts Receivable Facility expires in February 2004. Under the Accounts Receivable Facility, the receivables are sold at face value with payment of a portion of the purchase price being deferred. As of March 31, 1999, the total amount outstanding under the Accounts Receivable Facility was $40.7 million. Fees incurred in connection with the sale of accounts receivable for the three months ended March 31, 1999 were $358,000 and were recorded as other expense. 8 5. Earnings per share ------------------ A reconciliation of the numerators and denominators of the basic and diluted earnings per common share calculations for the three months ended March 31, 1999, and 1998 is presented below. (in thousands, except per share data) Three months ended March 31, (Unaudited) - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ Net income $ 12,823 $ 11,160 ============================================================================== Weighted-average shares outstanding: Weighted-average shares outstanding - Basic 69,977 69,184 Dilutive Securities 588 1,989 - ------------------------------------------------------------------------------ Weighted average shares outstanding - Diluted 70,565 71,173 ============================================================================== Earnings per common share Basic $ 0.18 $ 0.16 Diluted $ 0.18 $ 0.16 For the three months ended March 31, 1999 and 1998, 13,255,000 and 3,980,000, respectively, options outstanding were excluded from the calculations, as their effect would have been antidilutive. 6. Commitments and contingencies ----------------------------- Subject to certain conditions, the Company has committed to purchase titanium golf clubheads costing approximately $22.4 million from one of its vendors. Under the current schedule, the clubheads are to be shipped to the Company in 1999. The Company and its subsidiaries, incident to their business activities, are parties to a number of legal proceedings, lawsuits and other claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters as of March 31, 1999. Management believes, however, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company's annual consolidated financial position, results of operations or cash flows. 7. Restructuring ------------- During the fourth quarter of 1998, the Company recorded a restructuring charge of $54.2 million resulting from a number of cost reduction actions and operational improvements. These actions included the consolidation of the operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc. ("Odyssey"), into the operations of the Company while maintaining the distinct and separate Odyssey(R) brand image; the discontinuation, transfer or suspension of certain initiatives not directly associated with the Company's core business, such as the Company's involvement with interactive golf sites, golf book publishing, new player development and a golf venue in Las Vegas; and the re- sizing of the Company's core business to reflect current and expected business conditions. These 9 initiatives are expected to be completed largely during 1999. The restructuring charges (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities, resulting in costs incurred for employee severance, 2) the decision to exit certain non-core business activities, resulting in losses on disposition of assets, as well as excess lease costs; and 3) consolidation of the Company's continuing operations resulting in impairment of assets, losses on disposition of assets and excess lease costs. No material increases or decreases to the original estimated restructuring charge were made during the first quarter of 1999. Activity during the quarter primarily related to cash payments for severance, disposition of assets, contract cancellation and various other items. As of March 31, 1999, substantially all of the approximately 750 non-temporary work force reductions had occurred. Details of the one-time charge are as follows (in thousands):
Reserve Balance Reserve Cash/ One-Time at Balance Non-Cash Charge Activity 12/31/98 Activity at 3/31/99 ------------------------------------------------------------------------------ ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $2,493 $ 698 Severance packages Cash 11,603 8,412 3,191 2,493 698 Other Non-cash 61 61 EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $3,797 $12,976 Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,426 305 Excess lease costs Cash 12,660 146 12,514 97 12,417 Contract cancellation fees Cash 2,700 1,504 1,196 1,092 104 Other Cash 356 24 332 182 150 CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $2,787 $ 8,150 Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 2,457 7,177 Excess lease costs Cash 806 4 802 78 724 Other Cash 613 112 501 252 249 =============================================================================================================================
Future cash outlays are anticipated to be completed by the end of 1999, excluding certain lease commitments that continue through February 2013. 8. Segment Information ------------------- The Company's operating segments are organized on the basis of products and include golf clubs and golf balls. The golf clubs segment consists of Callaway(R) titanium and steel metal woods and irons, Callaway(R) and Odyssey(R) putters and wedges, and sales of related accessories. The golf balls segment consists of golf balls that are to be designed, manufactured, marketed and distributed by the Company's wholly-owned subsidiary, Callaway Golf Ball Company. In accordance with its restructuring plan, the Company is no longer pursuing the initiatives previously included in its All Other segments, which included interactive golf sites, golf book publishing, new player development and a driving range venture (Note 7). There are no significant intersegment transactions. The table below contains information utilized by management to evaluate its operating segments for the interim periods presented. 10
Three Months Ended March 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Additions to Additions to Income (loss) long-lived Income (loss) long-lived Net Sales before tax assets Net Sales before tax assets Golf Clubs $185,744 $28,700 $4,014 $176,908 $22,425 $15,740 - ----------------------------------------------------------------------------------------------------------------- Golf Balls (7,433) 28,441 (4,018) 1,691 - ----------------------------------------------------------------------------------------------------------------- Consolidated $185,744 $21,267 $32,455 $176,908 $18,407 $17,431 =================================================================================================================
9. Adoption of new accounting standard ----------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives are recorded each period in income or other comprehensive income, depending on whether the derivatives are designated as hedges and, if so, the types of hedges. SFAS No. 133 is effective for all periods beginning after June 15, 1999; the Company has elected to early adopt SFAS No. 133 on January 1, 1999. In the first quarter of 1999, the Company entered into forward foreign currency exchange rate contracts to hedge payments due on intercompany transactions by certain of its wholly-owned foreign subsidiaries. Realized and unrealized gains and losses on these contracts are recorded in income. The effect of this practice is to minimize variability in the Company's operating results arising from foreign exchange rate movements. The Company does not engage in foreign currency speculation. These foreign exchange contracts generally do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the intercompany transactions being hedged, and the Company does not engage in hedging contract which exceed the amount of the intercompany transactions. Transaction losses recorded during the three months ended March 31, 1999 and 1998 were not material. At March 31, 1999 and 1998, the Company had approximately $17.4 million and $13.9 million, respectively, of foreign exchange contracts outstanding. The contracts outstanding at March 31, 1999 mature between April and September of 1999. The Company's net unrealized gains and losses on foreign exchange contracts included in net income for the first quarter of 1999 and 1998 were not material. Adoption of this statement did not significantly affect the way in which the Company accounts for derivatives to hedge payments due on intercompany transactions. Accordingly, no cumulative-effect-type adjustments were made. However, the Company expects that it also may hedge anticipated transactions denominated in foreign currencies using forward foreign currency exchange rate contracts and put or call options. The forward contracts used to hedge anticipated transactions will be recorded as either assets or liabilities in the balance sheet at fair value. Gains and losses on such contracts will be recorded in other comprehensive income and will be recorded in income when the anticipated transactions occur. The ineffective portion of all hedges will be recognized in current period earnings. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements used in this discussion that relate to future plans, events, financial results or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers also are urged to carefully review and consider the various disclosures made by the Company which describe certain factors which affect the Company's business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors Affecting Callaway Golf Company" below, as well as the Company's other periodic reports on Forms 10-K and 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission. Readers also should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Further, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Accordingly, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company. Certain Factors Affecting Callaway Golf Company - ----------------------------------------------- Restructuring ------------- In the first quarter of 1999, the Company continued to implement its restructuring in accordance with the plan adopted in the fourth quarter of 1998. See "Restructuring" section below. Sales; Gross Margin; Seasonality -------------------------------- The Company believes that, although interest in golf appears to be growing, the worldwide premium golf equipment market has been declining and may continue to decline during the foreseeable future. Demand in the United States for premium golf equipment also declined in 1998, and the Company experienced a decline in U.S. sales in 1998. The economic turmoil in Southeast Asia, Korea and Japan continues to cause contraction in the retail golf markets in these countries and elsewhere around the world, and has had an adverse effect on the Company's sales and results of operations. Although the Company experienced increased sales in these regions in the first quarter of 1999 over 1998, the Company does not currently foresee any significant improvement in these markets for the rest of 1999. While sales of the Company's newly introduced Big Bertha Steelhead and Great Big Bertha Hawk Eye Titanium Metal Woods have been strong to date, no assurances can be given that the demand for these products or the Company's other existing products, or the introduction of new products, will permit the Company to experience growth in sales, or maintain historical levels of sales, in the future. Sales to Japan, which accounted for approximately 9% of the Company's total sales in 1998 and 10% of total sales in 1997, are expected to decrease in 1999 as the Company's distributor, Sumitomo Rubber Industries, Ltd. ("Sumitomo"), prepares for the transition of responsibility from it to ERC International Company ("ERC"), a wholly-owned Japanese subsidiary of the Company, by January 1, 2000. Although the Company experienced a slight increase in sales to Japan in the first quarter of 1999 over the first quarter of 1998, during the second half of 1999 the Company expects a significant decrease in shipments of Callaway Golf(R) products to Sumitomo compared to the second half of 1998. The Company believes this decrease in shipments will result as Sumitomo focuses on liquidating its existing inventory rather than placing new orders in anticipation of the transition. See "Certain Factors Affecting Callaway Golf Company-International distribution." 12 The Company experienced a decrease in its gross margin as a percentage of net sales during the first quarter of 1999 compared to the first quarter of 1998. The Company's lower gross margin related primarily to golf clubs sold during the first quarter, but which were manufactured in the fourth quarter of 1998 at higher labor and overhead rates, costs associated with consolidating manufacturing operations, and the ongoing sale and disposal of non-current product, partially offset by a favorable shift in product and regional sales mix. For all of 1999, the Company anticipates its gross margin percentage will exceed its 1998 levels. However, the Company does not expect to achieve its historical growth and operating margins during 1999 due to the anticipated sale and disposal of non-current products at reduced sales prices. Further, consumer acceptance of current and new product introductions as well as continuing pricing pressure from competitive market conditions may have an adverse effect on the Company's future sales and gross margin. In the golf equipment industry, sales to retailers are generally seasonal due to lower demand in the retail market in the cold weather months covered by the fourth and first quarters. The Company's business generally follows this seasonal trend and the Company expects this to continue. Unusual or severe weather conditions such as the "El Nino" weather patterns experienced during the winter of 1997-1998 may compound these seasonal effects. Competition ----------- The market in which the Company does business is highly competitive, and is served by a number of well-established and well-financed companies with recognized brand names, as well as new companies with popular products. New product introductions and/or price reductions by competitors continue to generate increased market competition and the Company believes that such competition has caused it to lose some unit market share and has negatively affected sales. While the Company believes that its products and its marketing efforts continue to be competitive, there can be no assurance that successful marketing activities by competitors will not negatively impact the Company's future sales. A manufacturer's ability to compete is in part dependent upon its ability to satisfy the various subjective requirements of golfers, including the golf club's look and "feel," and the level of acceptance that the golf club has among professional and other golfers. The subjective preferences of golf club purchasers also may be subject to rapid and unanticipated changes. There can be no assurance as to how long the Company's golf clubs will maintain market acceptance. For example, consumer support for shallow-faced metal woods increased in 1998, and many of the Company's competitors are making such products. The Company does not currently make a "shallow-faced" wood, and does not believe that the designs currently in the market are superior to its deeper- faced offerings. However, if "shallow-faced" products continue to gain consumer acceptance, the Company's sales could be negatively affected. New Product Introduction ------------------------ The Company believes that the introduction of new, innovative golf equipment is increasingly important to its future success. The Company faces certain risks associated with such a strategy. For example, new models and basic design changes in golf equipment are frequently met with consumer rejection. In addition, prior successful designs may be rendered obsolete within a relatively short period of time as new products are introduced into the marketplace. Further, new products that retail at a lower price than prior products may negatively impact the Company's revenues unless unit sales increase. New designs generally should satisfy the standards established by the United States Golf Association ("USGA") and the Royal and Ancient Golf Club of St. Andrews ("R&A") because these standards are generally followed by golfers within their respective jurisdictions. While all of the Company's current products have been found to conform to USGA and R&A rules, there is no assurance that new designs will receive USGA and/or R&A approval, or that existing USGA and/or R&A standards will not be altered in ways that adversely affect the sales of the Company's products. On November 2, 1998, the USGA announced the adoption of a test protocol to measure the so-called "spring-like effect" in certain golf clubheads. The USGA has advised the Company that none of the Company's current products are barred by this test. The R&A is considering the adoption of a similar or related test. Future actions by the USGA or the R&A may impede the Company's ability to introduce new products and therefore could have a material adverse effect on the Company's results of operations and cash flows. 13 The Company's new products have tended to incorporate significant innovations in design and manufacture, which have resulted in higher prices for the Company's products relative to other products in the marketplace. There can be no assurance that a significant percentage of the public will always be willing to pay such prices for golf equipment. Thus, although the Company has achieved certain successes in the introduction of its golf clubs in the past, no assurances can be given that the Company will be able to continue to design and manufacture golf clubs that achieve market acceptance in the future. The rapid introduction of new products by the Company can result in closeouts of existing inventories at both the wholesale and retail levels. Such closeouts can result in reduced margins on the sale of older products, as well as reduced sales of new products, given the availability of older products at lower prices. The Company plans its manufacturing capacity based upon the forecasted demand for its products. Actual demand for such products may exceed or be less than forecasted demand. The Company's unique product designs often require sophisticated manufacturing techniques, which can limit the Company's ability to quickly expand its manufacturing capacity to meet the full demand for its products. If the Company is unable to produce sufficient quantities of new products in time to fulfill actual demand, especially during the Company's traditionally busy second and third quarters, it could limit the Company's sales and adversely affect its financial performance. On the other hand, the Company commits to components and other manufacturing inputs for varying periods of time, which can limit the Company's ability to quickly react if actual demand is less than forecast. As in 1998, this could result in excess inventories and related obsolescence charges that could adversely affect the Company's financial performance. Product Breakage ---------------- The Company supports all of its golf clubs with a limited two year written warranty. Since the Company does not rely upon traditional designs in the development of its golf clubs, its products may be more likely to develop unanticipated problems than those of many of its competitors which use traditional designs. For example, clubs have been returned with cracked clubheads, broken graphite shafts and loose medallions. In addition, the Company's Biggest Big Bertha(R) Drivers, because of their large clubhead size and extra long, lightweight graphite shafts, have experienced shaft breakage at a rate higher than generally experienced with the Company's other metal woods, even though these shafts are among the most expensive to manufacture in the industry. While any breakage or warranty problems are deemed significant to the Company, the incidence of clubs returned as a result of cracked clubheads, broken graphite shafts, loose medallions and other product problems to date has not been material in relation to the volume of Callaway Golf clubs that have been sold. The Company monitors closely the level and nature of any product breakage and, where appropriate, seeks to incorporate design and production changes to assure its customers of the highest quality available in the market. Significant increases in the incidence of breakage or other product problems may adversely affect the Company's sales and image with golfers. While the Company believes that it has sufficient reserves for warranty claims, there can be no assurance that these reserves will be sufficient if the Company were to experience an unusually high incidence of breakage or other product problems. Credit Risk ----------- The Company primarily sells its products to golf equipment retailers and foreign distributors. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from these customers. The Company believes it has adequate reserves for potential credit losses. Historically, the Company's bad debt expense has been low. However, the recent downturn in the retail golf equipment market has resulted in delinquent or uncollectible accounts for some of the Company's significant customers. As a result, during 1998 the Company increased its reserve for credit losses. Management does not foresee any significant improvement in the golf equipment market during 1999, and thus there can be no assurance that failure of the Company's customers to meet their obligations to the Company will not increase. Any significant increase in delinquent or uncollectible trade accounts receivable may adversely impact the Company's results of operations or cash flows. 14 Dependence on Certain Vendors and Materials ------------------------------------------- The Company is dependent on a limited number of suppliers for its clubheads and shafts. In addition, some of the Company's products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The Company believes that suitable clubheads and shafts could be obtained from other manufacturers in the event its regular suppliers are unable to provide components. However, any significant production delay or disruption caused by the inability of current suppliers to deliver or the transition to other suppliers could have a material adverse impact on the Company's results of operations. The Company uses United Parcel Service ("UPS") for substantially all ground shipments of products to its U.S. customers. The Company is continually reviewing alternative methods of ground shipping to supplement its use and reduce its reliance on UPS. To date, a limited source of alternative vendors have been identified and adopted by the Company. Nevertheless, any interruption in UPS services could have a material adverse effect on the Company's sales and results of operations. The Company's size has made it a large consumer of certain materials, including titanium and carbon fiber. Callaway Golf does not make these materials itself, and must rely on its ability to obtain adequate supplies in the world marketplace in competition with other users of such materials. While the Company has been successful in obtaining its requirements for such materials thus far, there can be no assurance that it will always be able to do so. An interruption in the supply of such materials or a significant change in costs could have a material adverse effect on the Company. Intellectual Property and Proprietary Rights -------------------------------------------- The golf club industry, in general, has been characterized by widespread imitation of popular club designs. The Company has an active program of enforcing its proprietary rights against companies and individuals who market or manufacture counterfeits and "knock off" products, and aggressively asserts its rights against infringers of its copyrights, patents, trademarks, and trade dress. However, there is no assurance that these efforts will reduce the level of acceptance obtained by these infringers. Additionally, there can be no assurance that other golf club manufacturers will not be able to produce successful golf clubs which imitate the Company's designs without infringing any of the Company's copyrights, patents, trademarks, or trade dress. An increasing number of the Company's competitors have, like the Company itself, sought to obtain patent, trademark, copyright or other protection of their proprietary rights and designs. From time to time others have or may contact the Company to claim that they have proprietary rights that have been infringed by the Company and/or its products. The Company evaluates any such claims and, where appropriate, has obtained or sought to obtain licenses or other business arrangements. To date, there have been no interruptions in the Company's business as a result of any claims of infringement. No assurance can be given, however, that the Company will not be adversely affected in the future by the assertion of intellectual property rights belonging to others. This effect could include alteration of existing products, withdrawal of existing products and delayed introduction of new products. Various patents have been issued to the Company's competitors in the golf ball industry. As Callaway Golf Ball Company develops a new golf ball product, it attempts to avoid infringing valid patents or other intellectual property rights. If any new golf ball product is found to infringe on protected technology, the Company could incur substantial costs to redesign its golf ball product, obtain a license, or defend legal actions. Despite its efforts to avoid such infringements, there can be no assurance that Callaway Golf Ball Company will not infringe on the valid patents or other intellectual property rights of third parties in its development efforts, or that it will be able to obtain licenses to use any such rights, if necessary. The Company has stringent procedures to maintain the secrecy of its confidential business information. These procedures include criteria for dissemination of information and written confidentiality agreements with employees and vendors. Suppliers, when engaged in joint research projects, are required to enter into additional confidentiality agreements. There can be no assurance that these measures will prove adequate in all instances to protect the Company's confidential information. 15 "Gray Market" Distribution -------------------------- Some quantities of the Company's products find their way to unapproved outlets or distribution channels. This "gray market" in the Company's products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company's products, and can injure the Company's image in the minds of its customers and consumers. On the other hand, stopping such commerce could result in a potential decrease in sales to those customers who are selling Callaway Golf products to unauthorized distributors and/or an increase in sales returns over historical levels. For example, the Company experienced a decline in sales in the United States in 1998, and believes the decline was due, in part, to a decline in "gray market" shipments to Asia and Europe. While the Company has taken some lawful steps to limit commerce in its products in the "gray market" in both U.S. and international markets, it has not stopped such commerce. Golf Professional Endorsements ------------------------------ The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf branded golf clubs. The Company has entered into endorsement arrangements with members of the various professional tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour, the PGA European Tour and the Nike Tour. While most professional golfers fulfill their contractual obligations, some have been known to stop using a sponsor's products despite contractual commitments. To date, the Company believes that the cessation of use by professional endorsers of Callaway Golf brand products has not resulted in a significant amount of negative publicity. However, if certain of Callaway Golf's professional endorsers were to stop using the Company's products contrary to their endorsement agreements, the Company's business could be adversely affected in a material way by the negative publicity. Many professional golfers throughout the world use the Company's golf clubs even though they are not contractually bound to do so and do not grant any endorsement to the Company. The Company has created cash pools ("Pools") that reward such usage. For the last several years, the Company has experienced an exceptional level of driver penetration on the world's five major professional tours, and the Company has heavily advertised that fact. While it is not clear whether professional usage materially contributes to retail sales, it is possible that a decline in the level of professional usage of the Company's products could have a material adverse effect on the Company's business. As in past years, during 1998, the Company continued its Pools for the PGA, Senior PGA, LPGA and Nike Tours. The Company believes that its professional endorsements and its Pools contributed to its usage on the professional tours in 1998. However, in 1999, the Company has significantly reduced these Pools for the PGA and the Senior PGA Tours, and has eliminated the Pools for the LPGA and Nike Tours. In addition, many other companies are aggressively seeking the patronage of these professionals, and are offering many inducements, including specially designed products and significant cash rewards. As a result, the Company anticipates that the level of professional usage of the Company's products will be lower in 1999 than 1998. In the first quarter of 1999, driver usage on the PGA, Senior PGA, LPGA and Nike Tours was substantially reduced compared to the first quarter of 1998. New Business Ventures --------------------- The Company has invested significant capital in new business ventures. However, in connection with the Company's 1998 restructuring, the Company discontinued, transferred or suspended certain business ventures not directly associated with the Company's core business. See "Restructuring" section below. However, the Company continues development of its golf ball business. See "Certain Factors Affecting Callaway Golf Company - Golf Ball Development." 16 International Distribution -------------------------- The Company's management believes that controlling the distribution of its products throughout the world will be an element in the future growth and success of the Company. The Company has been actively pursuing a reorganization of its international operations, including the acquisition of distribution rights in certain key countries in Europe, Asia and North America. These efforts have resulted and will continue to result in additional investments in inventory, accounts receivable, corporate infrastructure and facilities. The integration of foreign distribution into the Company's international sales operations will require the dedication of management resources which may temporarily detract from attention to the day-to-day business of the Company. Additionally, the Company's plan of integration of foreign distribution increases the Company's exposure to fluctuations in exchange rates for various foreign currencies which could result in losses and, in turn, could adversely impact the Company's results of operations. There can be no assurance that the Company will be able to mitigate this exposure in the future through its management of foreign currency transactions. International reorganization also could result in disruptions in the distribution of the Company's products in some areas. There can be no assurance that the acquisition of some or all of the Company's foreign distribution will be successful, and it is possible that an attempt to do so will adversely affect the Company's business. In 1993, the Company, through a distributor agreement, appointed Sumitomo Rubber Industries, Ltd. as the sole distributor, and Sumitomo Corporation as the sole importer, of Callaway Golf(R) golf clubs in Japan. This distributor agreement runs through December 31, 1999. The Company has notified Sumitomo that it will be concluding the distribution agreement on December 31, 1999. During the second half of 1999, the Company expects a significant decrease in shipments of Callaway Golf(R) products to Sumitomo compared to the second half of 1998. The Company believes this decrease in shipments will result as Sumitomo focuses on liquidating its existing inventory rather than placing new orders in anticipation of the transition of distribution of Callaway Golf products from Sumitomo to ERC. The Company has established ERC, a wholly-owned Japanese corporation, for the purpose of distributing Odyssey(R) products. ERC also will distribute Callaway Golf balls when ready and Callaway Golf clubs beginning January 1, 2000. There will be significant costs and capital expenditures invested in ERC before there will be sales sufficient to support such costs. However, these costs have not been material to date. Furthermore, there are significant risks associated with the Company's intention to effectuate distribution in Japan through ERC beginning January 2000, and it is possible that doing so will have a material adverse effect on the Company's operations and financial performance. Golf Ball Development --------------------- In 1996, the Company formed Callaway Golf Ball Company, a wholly-owned subsidiary of the Company, for the purpose of designing, manufacturing and selling golf balls. The Company has previously licensed the manufacture and distribution of a golf ball in Japan and Korea. The Company also distributed a golf ball under the trademark "Bobby Jones." These golf ball ventures were introduced primarily as promotional efforts and were not commercially successful. The Company has determined that Callaway Golf Ball Company will enter the golf ball business by creating, developing and manufacturing golf balls in a new plant constructed just for this purpose. The successful implementation of the Company's strategy could be adversely affected by various risks, including, among others, delays in product development, construction delays and unanticipated costs. The Company currently anticipates launching its golf ball in early 2000. However, there can be no assurance as to whether the golf ball developed will be ready by that time, that it will be commercially successful or that a return on the Company's investments will ultimately be realized. 17 The development of the Company's golf ball business, by plan, has had a significant negative impact on the Company's cash flows and results of operations and will continue to do so during 1999. The Company believes that many of the same factors that affect the golf equipment industry, including growth rate in the golf equipment industry, intellectual property rights of others, seasonality and new product introductions, also apply to the golf ball business. In addition, the golf ball business is highly competitive with a number of well-established and well-financed competitors. These competitors have established market share in the golf ball business, which the Company will need to penetrate for its golf ball business to be successful. Year 2000 Issue --------------- Historically, many computer programs have been written using two digits rather than four to define the applicable year, which could result in the program failing to properly recognize a year that begins with "20" instead of "19." This, in turn, could result in major system failures or miscalculations, and is generally referred to as the "Year 2000" or "Y2K" issue. While the Company's own products do not contain date-based functionality and are not susceptible to the Y2K issue, much of the Company's operations incorporate or are affected by systems which may contain date-based functionality. Therefore, the Company has formulated a Year 2000 Plan to address the Company's Y2K issue. The Company's Year 2000 Plan contemplates four phases -- assessment, remediation, testing and release/installation -- which will overlap to a significant degree. The Company's own internal critical systems and key suppliers are the primary areas of focus. The Company believes critical systems and key suppliers are those systems or suppliers, which, if they are not Y2K compliant, may disrupt the Company's manufacturing, sales or distribution capabilities in a material manner. The assessment phase, which has been completed, involved an inventory, prioritization and preliminary evaluation of the Y2K compliance of the Company's key systems (e.g., hardware, software and embedded systems) and critical suppliers and customers (e.g., component suppliers, vendors, customers, utilities and other service providers) on which the Company relies to operate its business. During the assessment phase it was determined that over 450 of the Company's key systems were considered critical to the ongoing operations of the Company. Of these critical systems, the manufacturer certifies that approximately 60% are Y2K compliant, and the compliance of approximately 33% of the systems is undeterminable until they can be tested. Those systems tested and found not to be Y2K compliant, as well as the remaining 7% that are not Y2K compliant, will be fixed on the schedule discussed below. Also in connection with the assessment phase, the Company has been assessing the compliance of its critical suppliers and customers. The Company relies on suppliers for timely delivery of a broad range of goods and services worldwide, including components for its golf clubs. Moreover, the Company's suppliers rely on countless other suppliers, over which the Company has little or no influence regarding Y2K compliance. The level of preparedness of critical suppliers and customers can vary greatly from country to country. The Company believes that critical suppliers and customers present an area of significant risk to the Company in part because of the Company's limited ability to influence actions of third parties, and in part because of the Company's inability to estimate the level and impact of noncompliance of third parties throughout the extended supply chain. The Company has received information concerning the Y2K compliance status of critical suppliers and customers in response to extensive inquiries initiated in the Fall of 1998 to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Y2K issues. The process of evaluating these suppliers and selected customers is continuing and is expected to be completed by the fourth quarter of 1999. The Company has commenced the remediation phase and begun to identify and implement remediation options for its critical systems. The Company expects to complete this phase by mid-1999. Remediation for key systems will primarily include altering the product or software code, upgrading or replacing the product, recommending changes in how the product is used or retiring the product. 18 In October 1997, the Company implemented a new business computer system, which runs most of the Company's data processing and financial reporting software applications and has in part addressed remediation issues Company-wide. The manufacturer of the application software used on the new computer system has represented that the software addresses the Y2K issue, although recent testing of the software indicates that some level of remediation may be required. The information systems of the majority of the Company's subsidiaries have now been converted to the new system, and the Company anticipates converting the remaining material subsidiaries by mid-year 1999. The Company presently plans to have completed the four phases with respect to those systems which are critical to its operations no later than the end of the third quarter of 1999. Some non-critical systems may not be addressed until after January 2000. The total cost associated with assessment and required modifications to implement the Company's Year 2000 Plan is not expected to be material to the Company's financial position. The Company currently estimates that the total cost of implementing its Year 2000 Plan will not exceed $6.0 million. This preliminary estimate is based on presently available information and will be updated as the Company continues its assessment and proceeds with implementation. In particular, the estimate may need to be increased once the Company has formulated its contingency plan. The total amount expended on the Year 2000 Plan through March 1999 was $1,556,000, of which approximately $973,000 related to repair or replacing of software and related hardware problems and approximately $583,000 related to internal and external labor costs. If the Company's new business computer system fails due to the Y2K issue, or if any computer hardware or software applications or embedded systems critical to the Company's manufacturing, shipping or other processes are overlooked, or if the remaining subsidiary conversions are not made or are not completed timely, there could be a material adverse impact on the business operations and financial performance of the Company. Additionally, there can be no assurance that the Company's critical suppliers and customers will not experience a Y2K- related failure that could have a material adverse effect on the business operations or financial performance of the Company. In particular, if third party suppliers, due to the Y2K issue, fail to provide the Company with components or materials which are necessary to manufacture its products, with sufficient electric power and other utilities to sustain its manufacturing process, or with adequate, reliable means of transporting its products to its customers worldwide, then any such failure could have a material adverse effect on the business operations and financial performance of the Company. The Company has not yet established a contingency plan, but intends to formulate one to address unavoided or unavoidable risks and expects to have the contingency plan formulated by July 1999. In particular, with respect to third party component suppliers, the Company will develop contingency plans for suppliers determined to be at high risk of noncompliance or business disruption. The contingency plans are being developed on a case-by-case basis, and may include booking orders and producing products before anticipated business disruptions. Even so, judgments regarding contingency plans -- such as how to develop them and to what extent -- are themselves subject to many variables and uncertainties. There can be no assurance that the Company will correctly anticipate the level, impact or duration of noncompliance by suppliers that provide inadequate information. As a result, there is no certainty that the Company's contingency plans will be sufficient to mitigate the impact of noncompliance by suppliers, and some material adverse effect to the Company may result from one or more third parties regardless of defensive contingency plans. Estimates of time, cost, and risk are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer software code and systems; cooperation and remediation success of the Company's suppliers and customers (and their suppliers and customers); and the ability to correctly anticipate risks and implement suitable contingency plans in the event of system failures at the Company or its suppliers and customers (and their suppliers and customers). Euro Currency ------------- Many of the countries in which the Company sells its products are Member States of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999 Member States of the EMU have the option of trading in either their local currencies or the euro, the official currency of EMU participating Member States. Parties are free to choose 19 the unit they prefer in contractual relationships during the transitional period, beginning January 1999 and ending June 2002. The Company has installed a new computer system that supports sales throughout Europe. This new system runs substantially all of the principal data processing and financial reporting software for such sales. The Company anticipates that, after the implementation of an upgrade, the new system will contain the functionality to process transactions in either a country's local currency or euro. The implementation of this upgrade, which is part of a larger plan to update the Company's enterprise- wide software to the manufacturer's current version, is planned to take place during 2000. Until such time as the upgrade has occurred, transactions denominated in euro will be processed manually. The Company does not anticipate a large demand from its customers to transact in euros. Additionally, the Company does not believe that it will incur material costs specifically associated with manually processing data or preparing its business systems to operate in either the transitional period or beyond. However, there can be no assurance that the conversion of EMU Member States to euro will not have a material adverse effect on the Company and its operations. Results of Operations Three-month periods ended March 31, 1999 and 1998: Net sales increased 5% to $185.7 million for the three months ended March 31, 1999 compared to $176.9 million for the comparable period in the prior year. This increase was largely attributable to an overall increase in metal wood sales of $21.2 million for the three months ended March 31, 1999 versus 1998, resulting from the introduction of the Great Big Bertha(R) Hawk Eye(R) titanium metal woods in January 1999 and sales of Big Bertha(R) Steelhead(TM) metal woods, which were introduced in August 1998. This increase was partially offset by an overall decrease in sales of irons of $8.4 million during the first quarter of 1999 versus 1998. During the first quarter of 1999, sales to Japan and to the rest of Asia increased $4.2 million (20%) and $9.1 million (165%), respectively over the same quarter of the prior year and sales to Europe and other regions slightly increased during this period. Sales in the United States and in Canada decreased $7.6 million (7%) and $0.2 million (2%), respectively during the three months ended March 31, 1999 as compared to the same period in the prior year. For the three months ended March 31, 1999, gross profit decreased to $83.5 million from $83.7 million for the comparable period in the prior year. As a percentage of net sales, gross profit decreased to 45% from 47% for the quarter ended March 31, 1999 as compared to the same quarter of the prior year, primarily as a result of golf clubs sold during the first quarter, but which were manufactured in the fourth quarter of 1998 at higher labor and overhead rates, costs associated with consolidating manufacturing operations, and the ongoing sale and disposal of non-current product, partially offset by a favorable shift in product and regional sales mix. Selling expenses decreased to $31.3 million in the first quarter of 1999 compared to $35.8 million in the first quarter of 1998. As a percentage of net sales, selling expenses decreased to 17% from 20% during the first quarter of 1999 over the first quarter of 1998. The $4.5 million decrease was primarily the result of decreased advertising and professional tour expenses and decreased expenses resulting from the consolidation of Odyssey and the elimination of certain activities as part of the Company's restructuring. These decreases were partially offset by increased expenses associated with certain of the Company's foreign subsidiaries which were acquired during 1998, as well as costs resulting from the ramp-up of golf ball operations. General and administrative expenses increased to $21.7 million for the three months ended March 31, 1999 from $20.5 million for the comparable period in the prior year. As a percentage of net sales, general and administrative expenses in the first quarter of 1999 remained constant at 12%. The $1.2 million increase was largely attributable to the ramp-up of golf ball operations and higher costs associated with certain of the Company's foreign subsidiaries which were acquired during 1998. These increases were partially offset by decreases associated with the consolidation of Odyssey and other restructuring and operating expense reductions. Research and development expenses decreased to $8.5 million in the first quarter of 1999 compared to $8.7 million in the comparable period of the prior year. As a percentage of net sales, research and development expenses in the first quarter of 1999 remained constant at 5%. The $0.2 million decrease was primarily the result of the shut-down of the Company's prototype foundry, partially offset by costs associated with the ramp-up of golf ball operations. 20 Other expense increased $0.4 million for the quarter ended March 31, 1999 over the comparable period of the prior year. This increase was attributable to a decrease of interest income resulting from lower cash balances during three months ended March 31, 1999 versus 1998. Also contributing to this increase was higher interest expense and fees incurred during the three months ended March 31, 1999 related to draws on the Company's Amended Credit Agreement, Finance Agreement and Accounts Receivable Facility (see Notes 3 and 4 of the Company's unaudited Consolidated Condensed Financial Statements) due both to higher interest rates and higher average outstanding balances. Also contributing to the decrease were greater losses on disposal of assets and net foreign currency transaction losses for the first quarter of 1999 versus 1998. This decrease was partially offset by an increase in royalty income for the three months ended March 31, 1999 over the same period in 1998. Liquidity and Capital Resources At March 31, 1999, cash and cash equivalents decreased to $23.7 million from $45.6 million at December 31, 1998 primarily as a result of cash used in investing activities of $27.2 million and cash used in financing activities of $60.8 million, partially offset by cash provided by operations of $66.5 million. Cash flows used in investing activities resulted from capital expenditures, primarily associated with the ramp-up of golf ball operations, partially offset by proceeds from the sale of fixed assets, largely those related to the Company's restructuring. Cash flows used in financing activities is primarily attributed to the repayment of the Amended Credit Agreement and dividends paid, partially offset by proceeds from the Finance Agreement. The Company's principal source of liquidity, both on a short-term and long-term basis, has been cash flow provided by operations and the Company's credit facilities. The Company expects this trend to continue even though sales declined in 1998 and the Company does not foresee any significant improvement in sales during 1999. On February 12, 1999, the Company consummated the amendment of its line of credit to increase the revolving credit facility to up to $120.0 million and entered into an $80.0 million accounts receivable securitization facility (the "Accounts Receivable Facility") (see Notes 3 and 4 to the unaudited Consolidated Condensed Financial Statements). During the first quarter of 1999, the Company utilized its Accounts Receivable Facility and borrowed against its line of credit under the Amended Credit Agreement to fund operations and finance capital expenditures. At March 31, 1999, the Company had repaid the outstanding balance of the Amended Credit Agreement and had $157.5 million available, net of outstanding letters of credit, under its credit facilities, subject to meeting certain availability requirements under a borrowing base formula and other limitations. The Company anticipates continuing to utilize its Accounts Receivable Facility and to borrow against its line of credit during 1999 and expects to repay such borrowings with cash flow from operations. As a result of the implementation of its plan to improve operating efficiencies (see "Restructuring"), the Company incurred charges of $54.2 million in the fourth quarter of 1998. Of these charges, $25.5 million were non-cash. Since the adoption of this restructuring plan in the fourth quarter of 1998, cash outlays for employee termination costs, contract cancellation fees, excess lease costs and other expenses have been $14.4 million. Future cash outlays for such costs are estimated at $14.3 million. Of this amount, approximately $1.9 million is anticipated to occur primarily during the second quarter of 1999, while the remainder, which principally relates to excess lease costs, will be paid through February 2013. These cash outlays will be funded by cash flows from operations and the Company's credit facilities. If the actual actions taken by the Company differ from the plans on which these estimates are based, actual losses recorded and resulting cash outlays made by the Company could differ significantly. The Company believes that, based upon its current operating plan, analysis of its consolidated financial position and projected future results of operations, it will be able to maintain its current level of operations, including purchase commitments and planned capital expenditures for the foreseeable future, through operating cash flows and its credit facilities. There can be no assurance, however, that future industry specific or other developments, or general economic trends will not adversely affect the Company's operations or its ability to meet its future cash requirements. 21 Restructuring During the fourth quarter of 1998, the Company recorded a restructuring charge of $54.2 million resulting from a number of cost reduction actions and operational improvements. These actions included the consolidation of the operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc. ("Odyssey"), into the operations of the Company while maintaining the distinct and separate Odyssey(R) brand image; the discontinuation, transfer or suspension of certain initiatives not directly associated with the Company's core business, such as the Company's involvement with interactive golf sites, golf book publishing, new player development and a golf venue in Las Vegas; and the re- sizing of the Company's core business to reflect current and expected business conditions. These initiatives are expected to be completed largely during 1999. The restructuring charges (shown below in tabular format) primarily related to: 1) the elimination of job responsibilities, resulting in costs incurred for employee severance, 2) the decision to exit certain non-core business activities, resulting in losses on disposition of assets, as well as excess lease costs; and 3) consolidation of the Company's continuing operations resulting in impairment of assets, losses on disposition of assets and excess lease costs. No material increases or decreases to the original estimated restructuring charge were made during the first quarter of 1999. Activity during the quarter primarily related to cash payments for severance, disposition of assets, contract cancellation and various other items. As of March 31, 1999, substantially all of the approximately 750 non-temporary work force reductions had occurred. Details of the one-time charge are as follows (in thousands):
Reserve Balance Reserve Cash/ One-Time at Balance Non-Cash Charge Activity 12/31/98 Activity at 3/31/99 ------------------------------------------------------------------------------ ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191 $2,493 $ 698 Severance packages Cash 11,603 8,412 3,191 2,493 698 Other Non-cash 61 61 EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773 $3,797 $12,976 Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,426 305 Excess lease costs Cash 12,660 146 12,514 97 12,417 Contract cancellation fees Cash 2,700 1,504 1,196 1,092 104 Other Cash 356 24 332 182 150 CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937 $2,787 $ 8,150 Loss on impairment/disposition of assets Non-cash 12,364 2,730 9,634 2,457 7,177 Excess lease costs Cash 806 4 802 78 724 Other Cash 613 112 501 252 249 =============================================================================================================================
Future cash outlays are anticipated to be completed by the end of 1999, excluding certain lease commitments that continue through February 2013. The Company anticipates that its restructuring plan will generate savings going forward in excess of $40.0 million per year, beginning in 1999. Thus far in 1999, the Company is on track to realize these savings. In addition, the Company is continuing to implement an ongoing process of reviewing its manufacturing operations and its worldwide supplier network, aimed at reducing the cost of goods sold and generating significant savings. However, no assurances can be given that the full amount of the anticipated savings will be realized. 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to the impact of foreign currency fluctuations due to its international operations and certain export sales. The Company is exposed to both transactional currency/functional currency and functional currency/reporting currency exchange rate risks. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in the value of foreign currencies. Pursuant to its new foreign exchange hedging policy, beginning in January 1999, the Company may use forward foreign currency exchange rate contracts to hedge certain firm commitments and the related receivables and payables with its foreign subsidiaries. During the first quarter of 1999 the Company entered into such contracts on behalf of three of its wholly-owned subsidiaries, Callaway Golf Europe Ltd., Callaway Golf Canada Ltd., and ERC International Company. The effect of this practice is to minimize variability in the Company's operating results arising from foreign exchange rate movements. These foreign exchange contracts generally do not subject the Company to risk due to exchange rate movements because gains and losses on these contracts offset losses and gains on the intercompany transactions being hedged, and the Company does not engage in hedging contracts which exceed the amounts of these transactions. Also pursuant to its new foreign exchange hedging policy, the Company expects that it also may hedge anticipated transactions denominated in foreign currencies using forward foreign currency exchange rate contracts and put or call options. Foreign currency derivatives will be used only to the extent considered necessary to meet the Company's objectives and the Company does not enter into forward contracts for speculative purposes. The Company's foreign currency exposures include most European currencies, Japanese yen, Canadian dollar and Korean won. Additionally, the Company is exposed to interest rate risk from its Accounts Receivable Facility and Amended Credit Agreement (see Notes 3 and 4 to the Company's unaudited Consolidated Condensed Financial Statements) which are indexed to the LIBOR and Redwood Receivables Corporation Commercial Paper Rate. Sensitivity analysis is the measurement of potential loss in future earnings of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The Company used a sensitivity analysis model to quantify the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at March 31, 1999 through its derivative financial instruments. The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors. The estimated maximum one-day loss in earnings from the Company's foreign- currency derivative financial instruments, calculated using the sensitivity analysis model described above, is $1.7 million at March 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 3 and 4 to the unaudited Consolidated Condensed Financial Statements outlines the principal amounts, and other terms required to evaluate the expected cash flows and sensitivity to interest rate changes. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company, incident to its business activities, is the plaintiff in several legal proceedings, both domestically and abroad, in various stages of development. In conjunction with the Company's program of enforcing its proprietary rights, the Company has initiated a number of actions against alleged infringers under the intellectual property laws of various countries, including, for example, the United States Lanham Act, the U.S. Patent Act, and other pertinent laws. Some defendants in these actions have, among other things, contested the validity and/or the enforceability of 23 some of the Company's patents and/or trademarks. Others have asserted counterclaims against the Company. The Company believes that the outcome of these matters individually and in the aggregate will not have a material adverse effect upon the financial position or results of operations of the Company. It is possible, however, that in the future one or more defenses or claims asserted by defendants in one or more of those actions may succeed, resulting in the loss of all or part of the rights under one or more patents, loss of a trademark, a monetary award against the Company, or some other loss to the Company. One or more of these results could adversely affect the Company's overall ability to protect its product designs and ultimately limit its future success in the marketplace. In addition, the Company from time to time receives information claiming that products sold by the Company infringe or may infringe patent or other intellectual property rights of third parties. To date, the Company has not experienced any material expense or disruption associated with any such potential infringement matters. It is possible, however, that in the future one or more claims of potential infringement could lead to litigation, the need to obtain additional licenses, the need to alter a product to avoid infringement, or some other action or loss by the Company. The Company and its subsidiaries, incident to their business activities, are parties to a number of legal proceedings, lawsuits and other claims, including those discussed above. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts that may be covered by insurance, or the financial impact with respect to these matters. Management believes, however, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company's annual consolidated financial position, results of operations or cash flows. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K: a. Exhibits: -------- 3.1 Articles of Incorporation (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33-85692), as filed with the Securities and Exchange Commission (the "Commission") on October 28, 1994, and incorporated herein by this reference.) 3.2 Certificate of Amendment of Articles of Incorporation of the Company (filed as Exhibit 3.1.2 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, and incorporated herein by this reference.) 24 3.3 By-laws (as amended through May 10, 1996) (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 333-5719), as filed with the Commission on June 11, 1996, and incorporated herein by this reference.) 10.1 Executive Officer Employment Agreement by and between the Company and Ronald A. Drapeau dated as of August 11, 1997.(+) 10.2 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Ronald A. Drapeau(+) 10.3 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Steven C. McCracken(+) 10.4 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Frederick R. Port(+) 10.5 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and David A. Rane(+) 10.6 Amendment to Executive Deferred Compensation Plan dated as of January 1, 1999.(+) 27 Financial Data Schedule(+) - -------------------------- (+) Included with this Report. b. Reports on Form 8-K: ------------------- (1) On January 28, 1999, the Company filed a Current Report on Form 8-K reporting that the Company had entered into a credit agreement on December 30, 1998, providing revolving credit facilities of up to $75 million (including a $10 million letter of credit subfacility). (2) On February 25, 1999, the Company filed a Current Report on Form 8-K reporting that effective February 12, 1999, the Company had entered into an amended and restated credit agreement which increased the revolving credit facilities from the original $75 million to up to $120 million. The Company also reported that effective February 12, 1999, Odyssey Golf, Inc. and Callaway Golf Sales Company, both wholly-owned subsidiaries of the Company, Golf Funding Corporation, a newly formed wholly- owned subsidiary of Callaway Golf Sales Company, and the Company obtained an $80 million accounts receivable securitization facility. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CALLAWAY GOLF COMPANY Date: May 14, 1999 /s/ ELY CALLAWAY ------------ Ely Callaway Chairman, President and Chief Executive Officer /s/ DAVID A. RANE ------------- David A. Rane Executive Vice President, Administration and Planning and Chief Financial Officer 26 EXHIBIT INDEX ------------- Exhibit Number Description - ------- ----------- 3.1 Articles of Incorporation (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No. 33-85692), as filed with the Securities and Exchange Commission (the "Commission") on October 28, 1994, and incorporated herein by this reference.) 3.2 Certificate of Amendment of Articles of Incorporation of the Company (filed as Exhibit 3.1.2 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, and incorporated herein by this reference.) 3.3 By-laws (as amended through May 10, 1996) (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (No. 333- 5719), as filed with the Commission on June 11, 1996, and incorporated herein by this reference.) 10.1 Executive Officer Employment Agreement by and between the Company and Ronald A. Drapeau dated as of August 11, 1997.(+) 10.2 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Ronald A. Drapeau(+) 10.3 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Steven C. McCracken(+) 10.4 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and Frederick R. Port(+) 10.5 Amendment to Executive Officer Employment Agreement dated as of April 1, 1999, by and between the Company and David A. Rane(+) 10.6 Amendment to Executive Deferred Compensation Plan dated as of January 1, 1999.(+) 27 Financial Data Schedule(+) - -------------------------- (+) Included with this Report. EX-10.1 2 EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.1 EXECUTIVE OFFICER EMPLOYMENT AGREEMENT This Executive Officer Employment Agreement ("Agreement") is entered into as of August 11, 1997, by and between Callaway Golf Company, a California 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 term commencing August 11, 1997 and terminating December 31, 1999 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 of the Company, and as President and Chief Executive Officer of the Company's wholly-owned subsidiary, Odyssey Golf ("Odyssey"). Employee's duties shall be the usual and customary duties of the offices in which he or she serves. As Executive Vice President of the Company, Employee shall report to the President and Chief Executive Officer of the Company, or to such other person as the Chief Executive Officer shall designate. As President and Chief Executive Officer of Odyssey, Employee shall report to the Board of Directors of Odyssey, or to such person as the Board of Directors of Odyssey shall designate. Employee's titles, positions and/or duties may be changed by the Board of Directors and/or the Chief Executive Officer of the Company, or the Board of Directors of Odyssey, respectively. (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. 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 one of its affiliates, 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 or its affiliates 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 or its affiliates. 4. COMPENSATION. The Company agrees to pay Employee: ------------ (a) a base salary at the rate of $350,000.00 per year; and (b) an opportunity to earn an annual bonus based upon participation in the Company's Executive Bonus Plan as it may exist from time to time. 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 three (3) weeks paid vacation -------- for each twelve (12) month period of employment with the Company. The vacation may be taken any time during the year subject to prior approval by the Company, such approval not to be unreasonably withheld. Any unused time will accrue from year to year. The maximum vacation time Employee may accrue shall be three times Employee's annual vacation benefit. The Company reserves the right to pay Employee for unused, accrued vacation benefits in 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 reasonably qualifying for such insurance coverage; (iii) participate in the Company's 401(k) pension plan pursuant to the terms of the plan, as the same may be modified from time to time; (iv) participate in the Company's Executive Deferred Compensation Plan, as the same may be modified from time to time; and (v) participate in any other benefit plans the Company provides from time to time to executive officers. (d) Club Membership. The Company shall pay the reasonable cost of ---------------- initiation associated with Employee gaining privileges at a mutually agreed upon country club. Employee shall be responsible for all other expenses and costs associated with such club use, including monthly member dues and charges. The club membership itself shall belong to and be the property of the Company, not Employee. (e) Estate Planning and Other Perquisites. To the extent the Company -------------------------------------- provides estate planning and related services, or any other perquisites and personal benefits to other executive officers from time to time, such services and perquisites shall be made available to Employee on the same terms and conditions. 6. DISABILITY. If on account of any physical or mental disability ---------- Employee shall fail or be unable to perform all or substantially all of Employee's duties under this Agreement for a continuous period of up to six (6) months during any twelve month period during the term of this Agreement, Employee shall be entitled to his or her full compensation and benefits as set forth in this Agreement. If Employee's disability continues after such six (6) month period, this Agreement is subject to termination pursuant to the provisions of Section 8(e) hereof. 7. NONCOMPETITION. -------------- (a) Other Business. To the fullest extent permitted by law, Employee -------------- agrees that, while employed by the Company or any of its affiliates, 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 or any of its affiliates. (c) Suppliers. While employed by the Company or any of its --------- affiliates, 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 or any of its -------------------- affiliates, 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 or any of its affiliates. 8. TERMINATION. ----------- (a) Termination at the Company's Convenience. Employee's employment ---------------------------------------- under this Agreement may be terminated by the Company at its convenience at any time upon giving 90 days or longer notice to Employee. In the event of a termination at the Company's convenience, Employee shall be entitled to receive (i) any compensation accrued and unpaid as of the date of termination; (ii) the continued payment of base salary at the same rate and on the same schedule as in effect at the time of termination for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iii) the payment of nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as it existed on the date of termination, for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iv) the immediate vesting of all unvested stock options held by Employee as of such termination date; (v) the continuation of all benefits and perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time equal to the greater of the remainder of the term of this Agreement or six months; and (vi) no other severance. At Employee's option, Employee may elect in writing up to 60 days prior to termination to receive such payments and benefits as provided by subsection (ii) of this section in a lump sum payment representing all future payments due, discounted to their then present value at the prevailing major bank prime rate as of the date of termination. (b) Termination at Employee's Convenience. Employee's employment -------------------------------------- under this Agreement may be terminated immediately by Employee at his or her convenience at any time. In the event of a termination at the Employee's convenience, Employee shall be entitled to receive (i) any compensation accrued and unpaid as of the date of termination; (ii) severance pay equal to the nondiscretionary cash bonus Employee would have earned under the then existing Executive Bonus Plan in the fiscal year in which Employee's employment is terminated, prorated in accordance with the number of days in such fiscal year that elapsed prior to Employee's termination and payable at the same time and under the same terms and conditions as any other nondiscretionary bonuses paid to officers in that fiscal year; and (iii) no other severance. (c) Termination by the Company for Substantial Cause. Employee's ------------------------------------------------- employment under this Agreement may be terminated immediately by the Company for substantial cause at any time. In the event of a termination by the Company for substantial cause, Employee shall be entitled to receive (i) any compensation accrued and unpaid as of the date of termination; (ii) severance pay equal to the nondiscretionary cash bonus Employee would have earned under the then existing Executive Bonus Plan in the fiscal year in which Employee's employment is terminated, prorated in accordance with the number of days in such fiscal year that elapsed prior to Employee's termination and payable at the same time and under the same terms and conditions as any other nondiscretionary bonuses paid to officers in that fiscal year; and (iii) no other severance. "Substantial cause" shall mean for purposes of this subsection failure by Employee to substantially perform his her duties, breach of this Agreement, or misconduct, including but not limited to, dishonesty, theft, use or possession of drugs or alcohol during work, disloyalty and/or felony criminal conduct. (d) Termination by Employee for Substantial Cause. Employee's ---------------------------------------------- employment under this Agreement may be terminated immediately by Employee for substantial cause at any time. In the event of a termination by Employee for substantial cause, Employee shall be entitled to receive (i) any compensation accrued and unpaid as of the date of termination; (ii) the continued payment of base salary at the same rate and on the same schedule as in effect at the time of termination for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iii) the payment of nondiscretionary bonuses pursuant to the Company's Executive Bonus Plan, as it existed on the date of termination, for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iv) the immediate vesting of all unvested stock options held by Employee as of such termination date; (v) the continuation of all benefits and perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time equal to the greater of the remainder of the term of this Agreement or six months; and (vi) no other severance. At Employee's option, Employee may elect in writing up to 60 days prior to termination to receive such payments and benefits as provided by subsection (ii) of this subsection in a lump sum payment representing all future payments due, discounted to their then present value at the prevailing major bank prime rate as of the date of termination. "Substantial cause" shall mean for purposes of this subsection a material breach of this Agreement by the Company. (e) Termination Due to Permanent Disability. Subject to all ---------------------------------------- applicable laws, Employee's employment under this Agreement may be terminated immediately by the Company in the event Employee becomes permanently disabled. In the event of a termination by the Company due to Employee's permanent disability, Employee shall be entitled to (i) any compensation accrued and unpaid as of the date of termination; (ii) the continued payment of base salary at the same rate and on the same schedule as in effect at the time of termination for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iii) severance pay equal to the nondiscretionary cash bonus Employee would have earned under the then existing Executive Bonus Plan in the fiscal year in which Employee's employment is terminated, prorated in accordance with the number of days in such fiscal year that elapsed prior to Employee's termination and payable at the same time and under the same terms and conditions as any other nondiscretionary bonuses paid to officers in that fiscal year; (iv) the immediate vesting of outstanding but unvested stock options held by Employee as of such termination date in a prorated amount based upon the number of days in the option vesting period that elapsed prior to Employee's termination; (v) the continuation of all benefits and perquisites provided by Section 5(c)(i) and (ii) hereof for a period of time equal to the greater of the remainder of the term of this Agreement or six months; and (vi) no other severance. Termination under this subsection shall be effective immediately upon the date the Board of Directors of the Company formally resolves that Employee is permanently disabled. Subject to all applicable laws, "permanent disability" shall mean the inability of Employee, by reason of any ailment or illness, or physical or mental condition, to devote substantially all of his or her time during normal business hours to the daily performance of Employee's duties as required under this Agreement for a continuous period of six (6) months. At Employee's option, Employee may elect in writing up to 60 days prior to termination to receive such payments and benefits as provided by subsection (ii) of this section in a lump sum payment representing all future payments due, discounted to their then present value at the prevailing major bank prime rate as of the date of termination. (f) Termination Due to Death. Employee's employment under this ------------------------- Agreement may be terminated immediately by the Company in the event of Employee's death. In the event of a termination by the Company due to Employee's death, Employee's estate shall be entitled to (i) any compensation accrued and unpaid as of the date of termination; (ii) the continued payment of base salary at the same rate and on the same schedule as in effect at the time of termination for a period of time equal to the greater of the remainder of the term of this Agreement or six months; (iii) severance pay equal to the nondiscretionary cash bonus Employee would have earned under the then existing Executive Bonus Plan in the fiscal year in which Employee's employment is terminated, prorated in accordance with the number of days in such fiscal year that elapsed prior to Employee's termination and payable at the same time and under the same terms and conditions as any other nondiscretionary bonuses paid to officers in that fiscal year; (iv) the immediate vesting of outstanding but unvested stock options held by Employee as of such termination date in a prorated amount based upon the number of days in the option vesting period that elapsed prior to Employee's termination; and (v) no other severance. At Employee's option, Employee may elect in writing at least 60 days prior to termination to receive such payments and benefits as provided by subsection (ii) of this section in a lump sum payment representing all future payments due, discounted to their then present value at the prevailing major bank prime rate as of the date of termination. (g) Unless otherwise provided, any severance payments or other amounts due pursuant to this Section 8 shall be paid in cash within thirty (30) days of termination. Any severance payments shall be subject to usual and customary employee payroll practices and all applicable withholding requirements. Except for such severance pay and other amounts specifically provided pursuant to this Section 8, Employee shall not be entitled to any further compensation, bonus, damages, restitution, relocation benefits, or other severance benefits upon termination of employment during the term of this Agreement. The amounts payable to Employee pursuant to this Section 8 shall not be treated as damages, but as severance compensation to which Employee is entitled by reason of termination of employment under the applicable circumstances. The Company shall not be entitled to set off against the amounts payable to Employee hereunder any amounts earned by Employee in other employment after termination of his or her employment with the Company pursuant to this Agreement, or any amounts which might have been earned by Employee in other employment had Employee sought such other employment. The provisions of this Section 8 shall not limit Employee's rights under or pursuant to any other agreement or understanding with the Company or with Employee's participation in, or terminating distributions and vested rights under, any pension, profit sharing, insurance or other employee benefit plan of the Company to which Employee is entitled pursuant to the terms of such plan. (h) Termination By Mutual Agreement of the Parties. Employee's ---------------------------------------------- employment pursuant to this Agreement may be terminated at any time upon the mutual agreement in writing of the parties. Any such termination of employment shall have the consequences specified in such agreement. (i) Pre-Termination Rights. The Company shall have the right, at its ---------------------- option, to require Employee to vacate his or her office or otherwise remain off the Company's premises prior to the effective date of termination as determined above, and to cease any and all activities on the Company's behalf. 9. RIGHTS UPON A CHANGE IN CONTROL. ------------------------------- (a) If a Change in Control (as defined in Exhibit A hereto) occurs before the termination of Employee's employment hereunder, then this Agreement shall be 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 shall be that date which would permit the Extended Employment Agreement to continue in effect for an additional period of time equal to the full term of this Agreement. (b) Notwithstanding anything in this Agreement to the contrary, if upon or at any time within one year following any Change in Control that occurs during the term of this Agreement there is a Termination Event (as defined below), Employee shall be treated as if he or she had been terminated for the convenience of the Company and Employee shall be entitled to receive the same compensation and other benefits and entitlements as are described in Section 8(a) of this Agreement. Furthermore, the termination events and consequences described in 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 Sections 6 and 8(e)), Employee's death, and any of the factors enumerated in Section 8(c) as providing to the Company "substantial cause" for terminating Employee's employment: (i) the termination or material breach of this Agreement by the Company; (ii) a failure by the Company to obtain the assumption of this Agreement by any successor to the Company or any assignee of all or substantially all of the Company's assets; (iii) any material diminishment in the title, position, duties, responsibilities or status that Employee had with the Company, as a publicly traded entity, immediately prior to the Change in Control; (iv) any reduction, limitation or failure to pay or provide any of the compensation, reimbursable expenses, stock options, incentive programs, or other benefits or perquisites provided to Employee under the terms of this Agreement or any other agreement or understanding between the Company and Employee, or pursuant to the Company's policies and past practices as of the date immediately prior to the Change in Control; or (v) any requirement that Employee relocate or any assignment to Employee of duties that would make it unreasonably difficult for Employee to maintain the principal residence he or she had immediately prior to the Change in Control. 10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that upon ------------------------------ termination of employment in any manner, Employee will immediately surrender to the Company all lists, books and records of or connected with the business of the Company or any of its affiliates, and all other properties belonging to the Company or any of its affiliates, it being distinctly understood that all such lists, books, records and other documents are the property of the Company. 11. GENERAL RELATIONSHIP. Employee shall be considered an employee -------------------- 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. 8 12. PROPRIETARY INFORMATION. ----------------------- (a) Employee agrees that any trade secret or proprietary information of the Company or any of its affiliates to which Employee has become privy or may become privy to as a result of his or her employment with the Company or any of its affiliates shall not be divulged or disclosed to any other party (including, without limit, any person or entity with whom or in whom Employee has a business interest) without the express written consent of the Company, except as otherwise required by law. In addition, Employee agrees to use such information only during the term of this Agreement and only in a manner which is consistent with the purposes of this Agreement. In the event Employee believes that he or she is legally required to disclose any trade secret or proprietary information of the Company or any of its affiliates, Employee shall give reasonable notice to the Company prior to disclosing such information and shall take such legally permissible steps as are reasonably necessary to protect such trade secrets or proprietary information, including but not limited to, seeking orders from a court of competent jurisdiction preventing disclosure or limiting disclosure of such information beyond that which is legally required. The Company shall reimburse Employee for reasonable legal expenses incurred in seeking said orders. (b) Except as otherwise required by law, Employee shall hold in confidence all trade secret and proprietary information received from the Company or any of its affiliates until such information is available to the public generally or to the Company's competitors through no unauthorized act or fault of Employee. Upon termination of this Agreement, Employee shall promptly return any written proprietary information in his or her possession to the Company. (c) As used in this Agreement, "trade secret and proprietary information" means information, whether written or oral, not generally available to the public; it includes the concepts and ideas involved in the Company's and its affiliates' products, whether patentable or not; and includes, but is not limited to, the processes, formulae, and techniques disclosed by the Company or its affiliates to Employee or observed by Employee. It does not include: (i) Information, which at the time of disclosure, had been previously published; (ii) Information which is published after disclosure, unless such publication is a breach of this Agreement or is otherwise a violation of the contractual, legal or fiduciary duties owed to the Company or its affiliates, which violation is known to Employee; or (iii) Information which, subsequent to disclosure, is obtained by Employee from a third person who is lawfully in possession of such information (which information is not acquired in violation of any contractual, legal, or fiduciary 9 obligation owed to the Company or its affiliates with respect to such information, and is known by Employee) and does not require Employee to refrain from disclosing such information to others. (d) The provisions of this Section 12 shall survive the termination or expiration of this Agreement, and shall be binding upon Employee in perpetuity. 13. INVENTIONS AND INNOVATIONS. -------------------------- (a) As used in this Agreement, inventions and innovations mean ideas and improvements, whether or not patentable, relating to the design, manufacture, use or marketing of golf equipment or other products of the Company or its affiliates. This includes, but is not limited to, products, processes, methods of manufacture, distribution and management, sources of and uses for materials, apparatus, plans, systems and computer programs. (b) Employee agrees to disclose to the Chief Executive Officer and the Board of Directors of the Company any invention or innovation which he or she develops, either alone or with anyone else, during the term of Employee's employment with the Company or its affiliates, as well as any invention or innovation based on proprietary information of the Company, which Employee develops, whether alone or with anyone else, within twelve (12) months after the termination of Employee's employment with the Company or its affiliates. (c) Employee agrees to assign any invention or innovation to the Company: (i) which is developed totally or partially while Employee is employed by the Company or its affiliates; (ii) for which Employee used any of the Company's or its affiliates' equipment, supplies, facilities or proprietary information, even if any or all of such items are relatively minor, and have little or no monetary value; or (iii) which results in any way from Employee's work for the Company or its affiliates or relates in any way to the Company's or its affiliates' business or the Company's or its affiliates' current or anticipated research and development. (d) Employee understands and agrees that the existence of any condition set forth in either (c)(i), (ii) or (iii) above is sufficient to require Employee to assign his or her inventions or innovations to the Company. (e) All provisions of this Agreement relating to the assignment by Employee of any invention or innovation are subject to the provisions of California 10 Labor Code Sections 2870, 2871 and 2872. (f) Employee agrees that any invention 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, assignments to the Company, and all other applicable documents, and will give testimony when and where requested to perfect the title and/or patents (both within and without the United States) in all inventions or innovations belonging to the Company. (g) Employee shall disclose all inventions and innovations to the Company, even if Employee does not believe that he or she is required under this Agreement, or pursuant to California Labor Code Section 2870, to assign his or her interest in such invention or innovation to the Company. If the Company and Employee disagree as to whether or not an invention or innovation is included within the terms of this Agreement, it will be the responsibility of Employee to prove that it is not included. 14. ASSIGNMENT. This Agreement shall be binding upon and shall inure ---------- to the benefit of the parties hereto and the successors and assigns of the Company. Employee shall have no right to assign his rights, benefits, duties, obligations or other interests in this Agreement, it being understood that this Agreement is personal to Employee. 15. ATTORNEYS' FEES AND COSTS. If any arbitration or other ------------------------- proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute or default in connection with any of its provisions, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees incurred in such action or proceeding, in addition to any relief to which such party may be deemed entitled, if, and only if, the arbitrator finds that the non-prevailing party's position, taken as a whole, was frivolous or baseless. The prevailing party in any such proceeding shall be entitled to recover from the other party the reasonable costs and expenses of any such proceeding (not including attorneys' fees). 16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire -------------------- understanding of the parties hereto with respect to the subject matter hereof, and no other representations, warranties or agreements whatsoever as to that subject matter have been made by Employee or the Company not herein contained. This Agreement shall not be modified, amended or terminated except by another instrument in writing executed by the parties hereto. This Agreement replaces and supersedes any and all prior understandings or agreements between Employee and the Company regarding employment. 17. NOTICES. Any notice, request, demand, or other communication ------- required or permitted hereunder, shall be deemed properly given when 11 actually received or within five (5) days of mailing by certified or registered mail, postage prepaid, to: Employee: Ronald A. Drapeau 2911 Candil Place Carlsbad, California 92009 Company: Callaway Golf Company 2285 Rutherford Road Carlsbad, California 92008-8815 Attn: Donald H. Dye or to such other address as Employee or the Company may from time to time furnish, in writing, to the other. 18. ARBITRATION. Any dispute, controversy or claim arising hereunder ----------- or in any way related to this Agreement, its interpretation, enforceability, or applicability, or relating to Employee's employment, or the termination thereof, that cannot be resolved by mutual agreement of the parties shall be submitted to arbitration. The arbitration shall be conducted by a retired judge from the Judicial Arbitration and Mediation Service/Endispute ("JAMS") office located in Orange County, California, who shall have the powers to hear motions, control discovery, conduct hearings and otherwise do all that is necessary to resolve the matter. The arbitration award shall be final and binding, and judgment on the award may be entered in any court having jurisdiction thereof. It is expressly understood that the parties have chosen arbitration to avoid the burdens, costs and publicity of a court proceeding, and the arbitrator is expected to handle all aspects of the matter, including discovery and any hearings, in such a way as to minimize the expense, time, burden and publicity of the process, while assuring a fair and just result. In particular, the parties expect that the arbitrator will limit discovery by controlling the amount of discovery that may be taken (e.g., the number of depositions or interrogatories) and by restricting the scope of discovery to only those matters clearly relevant to the dispute. 19. MISCELLANEOUS. ------------- (a) Headings. The headings of the several sections and paragraphs of -------- this Agreement are inserted solely for the convenience of reference and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. (b) Waiver. Failure of either party at any time to require ------ performance by the other of any provision of this Agreement shall in no way affect that party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be held to be a waiver of any succeeding breach of any provision or a waiver of the provision itself. 12 (c) Applicable Law. This Agreement shall constitute a contract under -------------- the internal laws of the State of California and shall be governed and construed in accordance with the laws of said state as to both interpretation and performance. (d) Severability. In the event any provision or provisions of this ------------ Agreement is or are held invalid, the remaining provisions of this Agreement shall not be affected thereby. 20. SUPERSEDES OLD EMPLOYMENT CONTRACT. Employee and the Company ---------------------------------- recognize that prior to the effective date of this Agreement they were parties to a certain Employment Agreement effective October 14, 1996 (the "Old 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 Employment Agreement entirely, that the Old Employment Agreement shall no longer be of any force or effect except as to Sections 7, 11, 12, 14 and 17 thereof, and that to the extent there is any conflict between the Old Employment Agreement and this Agreement, this Agreement shall control and both agreements shall be construed so as to give the maximum force and effect to the provisions of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed effective the date first written above. EMPLOYEE: COMPANY: CALLAWAY GOLF COMPANY, a California corporation /s/ By: /s/ - ------------------------- ------------------------------ Ronald A. Drapeau Donald H. Dye, President & CEO 13 EXHIBIT A A "Change in Control" means the following and shall be deemed to occur if any of the following events occurs: (a) Any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding the Company and its subsidiaries and any employee benefit or stock ownership plan of the Company or its subsidiaries and also excluding an underwriter or underwriting syndicate that has acquired the Company's securities solely in connection with a public offering thereof (such person, entity or group being referred to herein as a "Person") becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (b) Individuals who, as of the effective date hereof, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of the Company, provided that any individual who becomes a director after the effective date hereof whose election, or nomination for election by the Company's shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered to be a member of the Incumbent Board unless that individual was nominated or elected by any Person having the power to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or more of either the outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors, in which case that individual shall not be considered to be a member of the Incumbent Board unless such individual's election or nomination for election by the Company's shareholders is approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; or (c) Consummation by the Company of the sale or other disposition by the Company of all or substantially all of the Company's assets or a reorganization or merger or consolidation of the Company with any other person, entity or corporation, other than (i) a reorganization or merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto (or, in the case of a reorganization or merger or consolidation that is preceded or accomplished by an acquisition or series of related acquisitions by any Person, by tender or exchange offer or otherwise, of voting securities representing 5% or more of the combined voting power of all securities of the Company, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, 14 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 (ii) a reorganization or merger or consolidation effected to implement a recapitalization or reincorporation of the Company (or similar transaction) that does not result in a material change in beneficial ownership of the voting securities of the Company or its successor; or (d) Approval by the shareholders of the Company or an order by a court of competent jurisdiction of a plan of liquidation of the Company. 15 EX-10.2 3 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.2 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT This Amendment to Executive Officer Employment Agreement (this "Amendment") is made effective as of April 1, 1999 by and between Callaway Golf Company, a California corporation (the "Company") and Ronald A. Drapeau ("Employee"). A. The Company and Employee are parties to that certain Executive Officer Employment Agreement entered into as of August 11, 1997 (the "Agreement"). B. The Company and Employee desire to amend the Agreement pursuant to Section 16 of the Agreement, in the manner set forth herein. C. The Company is prepared to grant, and Employee is prepared to receive, an increase in compensation as consideration for such amendment. NOW, THEREFORE, in consideration of the foregoing and other consideration, the value and sufficiency of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. Paragraph 2(a) of the Agreement is hereby amended to read as follows: Effective February 16, 1999, 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 the President and Chief Executive Officer of the Company, or to such other person as the Chief Executive Officer shall designate. Employee's titles, positions and/or duties may be changed by the Board of Directors and/or the Chief Executive Officer of the Company. 2. Paragraph 4(a) of the Agreement is hereby amended to read as follows: (a) a base salary at the rate of $450,000.00 per year; and 3. Paragraph 5(b) of the Agreement is amended to read as follows: (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 time will accrue from year to year. The maximum vacation time Employee may accrue shall be three times Employee's annual vacation benefit. The Company reserves the right to pay Employee for unused, accrued vacation benefits in lieu of providing time off. 4. Paragraph 7 of the Agreement is amended to read as follows: 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 or injure, or disparage, the Company, its officers, directors, employees, agents, affiliates, vendors, products, or customers, or their 2 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. 5. Paragraph 10 of the Agreement is amended to read as follows: 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. 6. Paragraph 12 of the Agreement is amended to read as follows: 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), 3 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 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. 7. Paragraph 13 of the Agreement is amended to read as follows: 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 4 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 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 5 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. 8. But for the amendments contained herein, and any other written amendments properly executed by the parties, the Agreement shall otherwise remain unchanged. IN WITNESS WHEREOF, the Company and Employee have caused this Amendment to be executed effective as of the date set forth above. EMPLOYEE COMPANY Callaway Golf Company, a California corporation /s/ By: /s/ - ----------------------- ------------------------ Ronald A. Drapeau Name: Ely Callaway Title: Chairman and CEO 6 EX-10.3 4 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.3 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT This Amendment to Executive Officer Employment Agreement (this "Amendment") is made effective as of April 1, 1999 by and between Callaway Golf Company, a California corporation (the "Company") and Steven McCracken ("Employee"). A. The Company and Employee are parties to that certain Executive Officer Employment Agreement entered into as of January 1, 1997 (the "Agreement"). B. The Company and Employee desire to amend the Agreement pursuant to Section 16 of the Agreement, in the manner set forth herein. C. The Company is prepared to grant, and Employee is prepared to receive, an increase in compensation as consideration for such amendment. NOW, THEREFORE, in consideration of the foregoing and other consideration, the value and sufficiency of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. Paragraph 4(a) of the Agreement is hereby amended to read as follows: (a) a base salary at the rate of $450,000.00 per year; and 2. Paragraph 5(b) of the Agreement is amended to read as follows: (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 time will accrue from year to year. The maximum vacation time Employee may accrue shall be three times Employee's annual vacation benefit. The Company reserves the right to pay Employee for unused, accrued vacation benefits in lieu of providing time off. 3. Paragraph 7 of the Agreement is amended to read as follows: 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, 1 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 or 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. 4. Paragraph 10 of the Agreement is amended to read as follows: 10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee ----------------------------------------- understands and agrees that all equipment, 2 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. 5. Paragraph 12 of the Agreement is amended to read as follows: 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 3 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 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. 6. Paragraph 13 of the Agreement is amended to read as follows: 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. 4 (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 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 5 termination or expiration of this Agreement, and shall be binding upon Employee in perpetuity. 7. But for the amendments contained herein, and any other written amendments properly executed by the parties, the Agreement shall otherwise remain unchanged. IN WITNESS WHEREOF, the Company and Employee have caused this Amendment to be executed effective as of the date set forth above. EMPLOYEE COMPANY Callaway Golf Company, a California corporation /s/ By: /s/ - --------------------- -------------------------- Steven McCracken Name: Ely Callaway Title: Chairman and CEO 6 EX-10.4 5 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.4 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT This Amendment to Executive Officer Employment Agreement (this "Amendment") is made effective as of April 1, 1999 by and between Callaway Golf Company, a California corporation (the "Company") and Frederick R. Port ("Employee"). A. The Company and Employee are parties to that certain Executive Officer Employment Agreement entered into as of January 1, 1997 (the "Agreement"). B. The Company and Employee desire to amend the Agreement pursuant to Section 16 of the Agreement, in the manner set forth herein. C. The Company is prepared to grant, and Employee is prepared to receive, an increase in compensation as consideration for such amendment. NOW, THEREFORE, in consideration of the foregoing and other consideration, the value and sufficiency of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. Paragraph 4(a) of the Agreement is hereby amended to read as follows: (a) a base salary at the rate of $580,000.00 per year, with the opportunity to receive increases (but not decreases) in such base salary in accord with the Company's plans and policies as they may exist from time to time for its senior executive officers; and 2. Paragraph 5(b) of the Agreement is amended to read as follows: (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 time will accrue from year to year. The maximum vacation time Employee may accrue shall be three times Employee's annual vacation benefit. The Company reserves the right to pay Employee for unused, accrued vacation benefits in lieu of providing time off. 3. Paragraph 7 of the Agreement is amended to read as follows: 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 or 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. Unless 2 and until advised otherwise by the Chief Executive Officer, Employee is an approved designee authorized to communicate with the press or media about the Company's international business. 4. Paragraph 10 of the Agreement is amended to read as follows: 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. 5. Paragraph 12 of the Agreement is amended to read as follows: 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 3 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 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. 6. Paragraph 13 of the Agreement is amended to read as follows: 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. 4 (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 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, 5 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. 7. But for the amendments contained herein, and any other written amendments properly executed by the parties, the Agreement shall otherwise remain unchanged. IN WITNESS WHEREOF, the Company and Employee have caused this Amendment to be executed effective as of the date set forth above. EMPLOYEE COMPANY Callaway Golf Company, a California corporation /s/ By: /s/ - ----------------------- -------------------------- Frederick R. Port Ely Callaway Chairman and CEO 6 EX-10.5 6 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT EXHIBIT 10.5 AMENDMENT TO EXECUTIVE OFFICER EMPLOYMENT AGREEMENT This Amendment to Executive Officer Employment Agreement (this "Amendment") is made effective as of April 1, 1999 by and between Callaway Golf Company, a California corporation (the "Company") and David Rane ("Employee"). A. The Company and Employee are parties to that certain Executive Officer Employment Agreement entered into as of January 1, 1997 (the "Agreement"). B. The Company and Employee desire to amend the Agreement pursuant to Section 16 of the Agreement, in the manner set forth herein. C. The Company is prepared to grant, and Employee is prepared to receive, an increase in compensation as consideration for such amendment. NOW, THEREFORE, in consideration of the foregoing and other consideration, the value and sufficiency of which are hereby acknowledged, the Company and Employee hereby agree as follows: 1. Paragraph 4(a) of the Agreement is hereby amended to read as follows: (a) a base salary at the rate of $450,000.00 per year; and 2. Paragraph 5(b) is amended to read as follows: (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 time will accrue from year to year. The maximum vacation time Employee may accrue shall be three times Employee's annual vacation benefit. The Company reserves the right to pay Employee for unused, accrued vacation benefits in lieu of providing time off. 3. Paragraph 7 of the Agreement is amended to read as follows: 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 or 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. 4. Paragraph 10 of the Agreement is amended to read as follows: 10. SURRENDER OF EQUIPMENT, BOOKS AND RECORDS. Employee ----------------------------------------- understands and agrees that all equipment, books, records, customer lists and documents connected with the 2 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. 5. Paragraph 12 of the Agreement is amended to read as follows: 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 3 from disclosing such information to others. (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. 6. Paragraph 13 of the Agreement is amended to read as follows: 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. 4 (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 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 5 Employee in perpetuity. 7. But for the amendments contained herein, and any other written amendments properly executed by the parties, the Agreement shall otherwise remain unchanged. IN WITNESS WHEREOF, the Company and Employee have caused this Amendment to be executed effective as of the date set forth above. EMPLOYEE COMPANY Callaway Golf Company, a California corporation /s/ By: /s/ - ---------------- ------------------------- David Rane Name: Ely Callaway Title: Chairman and CEO 6 EX-10.6 7 1ST AMDT. TO RESTATED EXECUTIVE DEFERRED COMP PLAN EXHIBIT 10.6 FIRST AMENDMENT TO CALLAWAY GOLF COMPANY RESTATED EXECUTIVE DEFERRED COMPENSATION PLAN This First Amendment (this "Amendment") to Callaway Golf Company Restated Executive Deferred Compensation Plan (the "Plan") is made effective as of the first day of January 1999 by Callaway Golf Company ("Callaway Golf"). A. Callaway Golf established the Plan to provide deferred compensation to a select group of management or highly compensated employees through an unfunded "top hat" arrangement exempt from the fiduciary, funding, vesting and plan termination insurance provisions of Title I and Title IV of the Employee Retirement Income Security Act; and B. The Board of Directors has approved the amendment of the Plan to (i) clarify the date on which an expression of investment preferences takes effect for purpose of determining assets allocable to a participant's hypothetical account under the Plan, (ii) provide generally that communication occurs only when the Company or its designee receives the investment instructions, (iii) clarify that the Company retains ultimate control over investment decisions (as required under Internal Revenue procedures or regulations) even where the participants have direct access to investment assets, and (iv) modify the timing of the distributions from the Plan upon an employee's termination of employment. NOW, THEREFORE, the Plan is amended as follows: 1. Section 5.2, captioned "Investment Elections," is hereby deleted in its entirety and replaced as follows: "In accordance with rules, procedures and options established by the Committee, a Participant shall have the right to express preferences with respect to the investment of his or her Account, except for any period of time during which the Company limits Account earnings to interest accruals under Section 5.4 below. In accordance with procedures established by the Plan Administrator, a Participant may change his or her investment preferences twice each Plan Year. Such changes may be made, if at all, during the three-week period immediately following the quarterly distribution of individual account statements. As a general rule, an investment preference expressed by a Participant shall take effect on the first business day of the month following the Participant's communication of such preference. Ordinarily, a participant's communication occurs only when the Committee, the Company, the Plan Administrator, the trustee of the Trust (or any person designated by any of them to process or implement investment instructions) receives actual notice of a Participant's investment preference. A Participant may transmit such notice by any means of communication which the Company may permit under the Plan, such as hand delivery, U.S. Mail, commercial courier, telephone, facsimile or Internet. The Participant assumes any risk posed by the means of communication which he or she selects. Although the Company shall have the hypothetical obligation to follow the Participant's investment preferences, the Company, in its sole discretion, may satisfy its hypothetical obligation from time to time in one or both of the following ways. First, the Company may invest assets hypothetically allocable to the Participant's Accounts in the specific investments, in the specific amounts and for the specific periods requested by the Participant; and the Company must credit or charge the Participant's Accounts with the earnings, gains or losses resulting from such investments. Second, the Company reserves the right -- exercisable in its sole discretion at any time and from time to time, without notice or Plan amendment -- to add, modify, suspend, terminate or override (i) any investment preference communicated by a Participant, (ii) any investment option made available to a Participant, or (iii) any means of communicating investment preferences and other information under the Plan; provided, however, the Company must credit or charge the Participant's Accounts with the same earnings, gains or losses that the Participant would have incurred if the Company had invested the assets hypothetically allocable to the Participant's Accounts in the specific investments, in the specific amounts and for the specific periods requested by the Participant. If this Plan is determined to be subject to the fiduciary provisions of Part 4 of Title I of ERISA, this Plan shall be treated as a Plan described in Section 404(c) of ERISA and Title 29 of the Code of Federal Regulations Section 2550.404c-1, in which Plan fiduciaries may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by a Participant or Beneficiary." 2. Section 7.3, starting at page 12, of the Plan, captioned "Termination of Employment" is deleted in its entirety and replaced as follows: "Upon Termination of the Employment of a Participant or Inactive Participant, the Company shall distribute his or her Account under the Plan, as elected by the Participant or Inactive Participant (at the time of his or her deferral of Compensation) in a lump sum or in five, ten or fifteen substantially equal annual installments. For terminations prior to January, 1, 1999, the payment from the account shall occur or commence within 30 days after the first day of the calendar year immediately following the calendar year in which the Termination of Employment occurs. For terminations after December 31, 1998, the payment from the Account shall occur or commence within the 30-day period immediately following the Termination of Employment." 3. After the effective date of this Amendment, each reference in the Plan to the "Plan" shall mean and refer to the Plan as amended hereby. Except as provided in this Amendment, the Plan and all related documents shall remain in full force and effect and are ratified and confirmed. IN WITNESS WHEREOF, this First Amendment to the Plan has been executed as of the date set forth above. CALLAWAY GOLF COMPANY By: /s/ DAVID A. RANE ----------------------------- Name: David A. Rane Title: Executive Vice President, Administration and Planning, and Chief Financial Officer EX-27 8 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CALLAWAY GOLF COMPANY UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET AND UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF INCOME AT MARCH 31, 1999 AND FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 23,653 0 75,608 10,271 153,932 268,454 106,911 84,327 619,283 137,643 0 0 0 755 461,574 619,283 185,744 185,744 102,224 102,224 0 280 1,476 21,267 8,444 12,823 0 0 0 12,823 0.18 0.18
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