SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 RUTHERFORD ROAD
CARLSBAD, CA 92008-8815
(760) 931-1771
(Address, including zip code, and telephone number, including area code of
principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange
Preferred Share Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 8, 1999, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $816,632,022 based on the
closing sales price of the Registrant's Common Stock as reported in the
consolidated transactions reporting system.
As of March 8, 1999, the number of shares of the Registrant's Common Stock
outstanding was 75,526,661, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II and IV incorporate certain information by reference from the
Registrant's Annual Report to shareholders for the fiscal year ended December
31, 1998.
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on May 5, 1999, which proxy statement was filed on April 1, 1999.
Note: Statements used in this discussion that relate to future plans, events,
financial results or performance are forward-looking statements as defined under
the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers also are urged to
carefully review and consider the various disclosures made by the Company which
describe certain factors which affect the Company's business, as well as the
Company's other periodic reports on Forms 10-K and 10-Q and Current Reports on
Form 8-K filed with the Securities and Exchange Commission.
Readers also should be aware that while the Company does, from time to
time, communicate with securities analysts, it is against the Company's policy
to disclose to them any material non-public information or other confidential
commercial information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Further, the Company has a policy
against issuing or confirming financial forecasts or projections issued by
others. Accordingly, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of the Company.
PART I
ITEM 1. BUSINESS.
Callaway Golf Company (the "Company" or "Callaway Golf") is a California
corporation formed in 1982 and has the following directly wholly-owned operating
subsidiaries: Callaway Golf Sales Company, Callaway Golf Ball Company, CGV,
Inc., Callaway Golf Europe Ltd. (formerly Callaway Golf (UK) Limited), ERC
International Company, Callaway Golf Korea, Ltd., Callaway Golf (Germany) GmbH,
Callaway Golf Canada Ltd. and Callaway Golf Europe, S.A. (France). The Company
designs, develops, manufactures and markets high quality, innovative golf clubs.
The Company's golf clubs are sold at premium prices to both average and skilled
golfers on the basis of performance, ease of use and appearance. Callaway Golf's
primary products, most of which incorporate the Company's S2H2(R) design
concept, currently include Big Bertha(R) Steelhead(TM) Stainless Steel Drivers
and Fairway Woods, Great Big Bertha(R) Hawk Eye(R) Drivers and Fairway Woods,
Biggest Big Bertha(R) Titanium Drivers, Great Big Bertha(R) Tungsten
Titanium(TM) Irons, Big Bertha(R) X-12(TM) Irons, and various putters, including
the Bobby Jones(R) Series Putters and the Carlsbad Series Putters. The Company
also manufactures and markets the Odyssey(R) brand line of putters and wedges
with Stronomic(R) and Lyconite(TM) face inserts. The Company currently is
constructing a golf ball manufacturing plant for its wholly-owned subsidiary,
Callaway Golf Ball Company, and anticipates manufacturing and marketing golf
balls by late 1999 or early 2000. See "Item 1. Business-Product Design and
Development-Golf Ball Development."
SEGMENTS
Information regarding the Company's segments is contained in Note 14
of the Consolidated Financial Statements in the Company's Annual Report to
Shareholders for the year ended December 31, 1998 ("1998 Annual Report to
Shareholders"), which is incorporated herein by reference.
RESTRUCTURING
On November 11, 1998, the Company announced that it had adopted a business
plan that included a number of cost reduction actions and operational
improvements. These actions included: the consolidation of the operations of the
Company's wholly-owned subsidiary, Odyssey Golf, Inc. ("Odyssey Golf"), into the
operations of the Company while maintaining the distinct and separate Odyssey(R)
brand image; the discontinuation, transfer or suspension of certain initiatives
not directly associated with the Company's core business, such as the Company's
involvement with interactive golf sites, golf book publishing, new player
development and a golf venue in Las Vegas; and the re-sizing of the Company's
core business to reflect current and expected business conditions. These
initiatives are expected to be largely completed during 1999. As a result of
these actions, the Company recorded one-time charges of $54.2 million during the
fourth quarter of 1998. These charges (shown below in tabular format) primarily
relate to: 1) the elimination of job responsibilities, resulting in costs
incurred for employee severance; 2) the decision to exit certain non-core
business activities, resulting in losses on disposition of the Company's 80%
interest in Callaway Golf Media Ventures
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(see Note 15 of the Consolidated Financial Statements in the 1998 Annual Report
to Shareholders), a loss on the sale of All-American Golf (See Note 13 of the
Consolidated Financial Statements in the 1998 Annual Report to Shareholders), as
well as excess lease costs; and 3) consolidation of the Company's continuing
operations resulting in impairment of assets, losses on disposition of assets
and excess lease costs. Without these charges, the Company's earnings per
diluted share would have been $0.13 for the year ended December 31, 1998.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31, 1998,
the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions will occur in the first quarter of 1999.
Details of the one-time charges are as follows (in thousands):
Reserve
One-Time Balance
Cash/Non-Cash Charge Activity at 12/31/98
-----------------------------------------------------
ELIMINATION OF JOB RESPONSIBILITIES $11,664 $ 8,473 $ 3,191
Severance packages Cash 11,603 8,412 3,191
Other Non-cash 61 61
EXITING CERTAIN NON-CORE BUSINESS ACTIVITIES $28,788 $12,015 $16,773
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731
Excess lease costs Cash 12,660 146 12,514
Contract cancellation fees Cash 2,700 1,504 1,196
Other Cash 356 24 332
CONSOLIDATION OF OPERATIONS $13,783 $ 2,846 $10,937
Loss on disposition/impairment of assets Non-cash 12,364 2,730 9,634
Excess lease costs Cash 806 4 802
Other Cash 613 112 501
Future cash outlays are anticipated to be completed by the end of 1999,
excluding certain lease commitments that continue through February 2013. The
Company anticipates that this business plan will generate savings going forward
in excess of $40.0 million per year, beginning in 1999. In addition, the Company
is continuing to implement an ongoing process of reviewing its manufacturing
operations and its worldwide supplier network aimed at reducing the cost of
goods sold and generating significant savings. However, no assurances can be
given that the full amount of the anticipated savings will be realized.
PRODUCTS
The following table sets forth the contribution to net sales attributable
to the product groups for the periods indicated (dollars in thousands).
Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------
Metal Woods $389,900 56% $544,258 64% $479,127 71%
Irons 229,112 33% 233,977 28% 168,576 25%
Putters, accessories
and other* 78,609 11% 64,692 8% 30,809 4%
---------------------------------------------------------------------------------
Net Sales $697,621 100% $842,927 100% $678,512 100%
=================================================================================
* 1998 and 1997 net sales include $49.2 and $20.5 million, respectively, of
Odyssey(R) putters and wedges.
The Company believes that, although interest in golf appears to be growing,
the worldwide premium golf equipment market has been declining and that it may
continue to decline during the foreseeable future. Demand in the
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United States for premium golf equipment also has declined in 1998, and the
Company experienced a decline in domestic sales in 1998. The economic turmoil in
Southeast Asia and Japan continues to cause contraction in the retail golf
markets in these countries and elsewhere around the world, and has had an
adverse effect on the Company's sales and results of operations. The Company
expects this situation to continue in 1999.
While sales of the Company's newly introduced Big Bertha(R) Steelhead(TM)
and Great Big Bertha(R) Hawk Eye(R) Titanium Metal Woods have been strong to
date, no assurances can be given that the demand for these products or the
Company's other existing products, or the introduction of new products, will
permit the Company to experience growth in sales, or maintain historical levels
of sales, in the future.
METAL WOODS
-----------
Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
In January 1999, the Company introduced and began delivery of significant
quantities of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods were
designed to replace the Company's Great Big Bertha(R) Titanium Drivers and
Fairway Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods incorporate a design with a totally new oversize clubhead incorporating a
thin titanium crownplate together with a strong, lightweight titanium body.
This design includes a new Tungsten Gravity Screw that is inserted into the sole
of the clubhead and produces a low and deep center of gravity. The Company
offers Great Big Bertha(R) Hawk Eye(R) Titanium Drivers in lofts ranging from 6
to 12 degrees. Great Big Bertha(R) Hawk Eye(R) Titanium Fairway Woods are
available in a 2-wood (The Deuce), Strong 3-wood, 3-wood, Strong 4-wood, 4-wood,
5-wood, 7-wood (Heaven Wood), and 9-wood (Divine Nine).
Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
In August 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway
Woods. Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
were designed to replace the Company's Big Bertha(R) Stainless Steel Drivers and
Fairway Woods with the War Bird(R) soleplate. Big Bertha(R) Steelhead(TM)
Stainless Steel Drivers and Fairway Woods have a large forgiving face and a
lightweight crownplate atop a heavier, stronger body that incorporates a
relatively heavy weight chip. This design produces a low center of gravity. The
Company offers Big Bertha(R) Steelhead(TM) Stainless Steel Drivers in lofts
ranging from 6 to 12 degrees. Big Bertha(R) Steelhead(TM) Stainless Steel
Fairway Woods are available in a 2-wood (The Deuce), Strong 3-wood, 3-wood,
Strong 4-wood, 4-wood, 5-wood, 7-wood (Heaven Wood), and 9-wood (Divine Nine),
11-wood (Ely Would).
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Biggest Big Bertha(R) Titanium Driver
In January 1997, the Company introduced Biggest Big Bertha(R) Titanium
Drivers. Biggest Big Bertha(R) Drivers have the largest titanium clubheads of
any of the Company's clubs to date, and provide maximum forgiveness, and
incorporate ultralight graphite shafts which are longer than Great Big
Bertha(R) Driver shafts. Although larger and longer, Biggest Big Bertha(R)
Drivers are lighter in overall weight than Great Big Bertha(R) Drivers. Biggest
Big Bertha(R) Drivers incorporate the S2H2(R) design concept, the War Bird(R)
soleplate (which features a deep dish on either side of the central facet
running rearward from the clubface) and an advanced internal weighting system
which increases the degree of perimeter weighting of the titanium clubhead. The
Company offers Biggest Big Bertha(R) Drivers in lofts ranging from 6 to 12
degrees.
IRONS
-----
Big Bertha(R) X-12(TM) Irons
In January 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) X-12(TM) Irons. Big Bertha(R) X-12(TM) Irons
incorporate a low center of gravity which helps get the ball airborne more
easily with the proper trajectory and spin. The varied 360-degree undercut
channel creates a thinner profile, and together with a new shape and a narrower
sole, keeps the center of gravity low. The unique multi-layer design in the
cavity allows for increased forgiveness on off-center hits. These irons are
offered in 1 through 9, and pitching, approach, sand, and lob wedges, with
either graphite or steel shafts.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons
In January 1997, the Company introduced Great Big Bertha(R)
Tungsten.Titanium(TM) Irons. Great Big Bertha(R) Tungsten.Titanium(TM) Irons
incorporate the same core design features as Big Bertha(R) Irons, but have a
slightly larger titanium clubhead with a specially designed tungsten inset to
concentrate weight low and deep in the clubhead. These design features are
intended to give these irons a lower and deeper sweet-spot compared to other
titanium irons. The Company offers Great Big Bertha(R) Tungsten.Titanium(TM)
Irons 1 through 9, and pitching, approach, sand and lob wedges, with either
graphite or steel shafts.
PUTTERS
-------
The Company has two lines of putters. Odyssey(R) brand putters sold by the
Company incorporate a soft, sensitive black trapezoidal Stronomic(R) insert
designed to provide better feel and forgiveness. This line includes the new
TriForce(TM) series of putters introduced in 1999, Rossie(TM) mallet putters and
Dual Force(R) blade style putters. The center of gravity in the TriForce(TM)
series of putters has been moved back and away from the face, which creates
better ball roll than similar-shaped clubs. This weight distribution is
achieved through having the largest Stronomic(R) insert of any Odyssey(R) putter
to date, coupled with a heavy, milled tungsten flange. The Company also has a
Callaway(R) line of steel and graphite shafted putters, including the new
Carlsbad Series putters. Some of these putters incorporate the S2H2(R) concept,
including the Tuttle(R) and the Tuttle(R) II putters. In 1996, the Company
introduced and commenced deliveries of the new Bobby Jones(R) line of putters,
consisting of three styles of precision-machined putters with a double-radius
bend, offset shaft. In 1997, 1998 and 1999 additional styles of the Bobby
Jones(R) putters were introduced.
ACCESSORIES
-----------
In addition to its golf clubs, Callaway Golf offers golf-related equipment
and supplies manufactured by other companies bearing the Callaway(R) logo,
including golf bags, travel bags, head covers, hats, umbrellas and other
accessories.
PRODUCT DESIGN AND DEVELOPMENT
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. The Company's research and development
5
expenses, which for 1998 and 1997 include those of Callaway Golf Ball Company
and Odyssey Golf's putter operations, were $36.8 million, $30.3 million and
$16.2 million during 1998, 1997, and 1996, respectively. The Company intends to
continue to invest substantial amounts in its research and development
activities in 1999 and beyond. In addition to development of new golf club
equipment, these investments will continue to include, among others, significant
expenditures in support of Callaway Golf Ball Company's efforts to develop and
market a new golf ball product.
Callaway Golf has the ability to create and modify golf club designs by
using computer aided design software ("CAD"), computer aided manufacturing
software ("CAM") and computer numerical control ("CNC") milling equipment. CAD
software enables designers to develop computer models of new clubhead and shaft
designs. CAM software is then used by engineers to translate the digital output
from CAD computer models so that physical prototypes can be produced. Through
the use of this technology, Callaway Golf has been able to greatly accelerate
the design, development and testing of new golf clubs.
The Company owns two induction furnaces (for casting ferrous and non-
ferrous alloys) and one cold-walled furnace (for casting titanium, nickel and
cobalt alloys) which are located in a foundry facility at the Company's
headquarters in Carlsbad, California. During 1998, the Company used its foundry
facility to cast its own prototype clubheads. In addition, the Company designs
and fabricates shaft prototypes at its technology center that also is located at
the Company's headquarters.
The Company believes that the introduction of new, innovative golf
equipment is increasingly important to its future success. The Company faces
certain risks associated with such a strategy. For example, new models and basic
design changes in golf equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete within a relatively
short period of time as new products are introduced into the marketplace.
Further, new products that retail at a lower price than prior products may
negatively impact the Company's revenues unless unit sales increase. New designs
generally should satisfy the standards established by the United States Golf
Association ("USGA") and the Royal and Ancient Golf Club of St. Andrews ("R&A")
because these standards are generally followed by golfers within their
respective jurisdictions. While all of the Company's current products have been
found to conform to USGA and R&A rules, there is no assurance that new designs
will receive USGA and/or R&A approval, or that existing USGA and/or R&A
standards will not be altered in ways that adversely affect the sales of the
Company's products.
On November 2, 1998, the USGA announced the adoption of a test protocol to
measure the so-called "spring-like effect" in certain golf clubheads. The USGA
has advised the Company that none of the Company's current products are barred
by this test. The R&A is considering the adoption of a similar or related test.
Future actions by the USGA or the R&A may impede the Company's ability to
introduce new products and therefore could have a material adverse effect on the
Company's results of operations.
The Company's new products have tended to incorporate significant
innovations in design and manufacture, which have resulted in higher prices for
the Company's products relative to other products in the marketplace. There can
be no assurance that a significant percentage of the public will always be
willing to pay such prices for golf equipment. Thus, although the Company has
achieved certain successes in the introduction of its golf clubs in the past, no
assurances can be given that the Company will be able to continue to design and
manufacture golf clubs that achieve market acceptance in the future.
The rapid introduction of new products by the Company can result in
closeouts of existing inventories at both the wholesale and retail levels. Such
closeouts can result in reduced margins on the sale of older products, as well
as reduced sales of new products, given the availability of older products at
lower prices. Historically, the Company has managed such closeouts so as to
avoid any material negative impact on the Company's operations, but there can be
no assurance that the Company will always be able to do so.
The Company plans its manufacturing capacity based upon the forecasted
demand for its products. Actual demand for such products may exceed or be less
than forecasted demand. The Company's unique product designs often require
sophisticated manufacturing techniques, which can limit the Company's ability to
quickly expand its manufacturing capacity to meet the full demand for its
products. If the Company is unable to produce sufficient quantities of new
products in time to fulfill actual demand, especially during the Company's
traditionally busy second and third quarters, it could limit the Company's sales
and adversely affect its financial performance. On the other hand, the Company
commits to components and other manufacturing inputs for varying periods of
time, which can limit the
6
Company's ability to quickly react if actual demand is less than forecast. As in
1998, this could result in excess inventories and related obsolescence charges
that could adversely affect the Company's financial performance.
Golf Ball Development
In 1996, the Company formed Callaway Golf Ball Company, a wholly owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company has previously licensed the manufacture and
distribution of a golf ball product in Japan and Korea. The Company also
distributed a golf ball under the trademark "Bobby Jones." These golf ball
ventures were introduced primarily as promotional efforts and were not
commercially successful.
The Company has determined that Callaway Golf Ball Company will enter the
golf ball business by creating, developing and manufacturing golf balls in a new
plant constructed just for this purpose. The successful implementation of the
Company's strategy could be adversely affected by various risks, including,
among others, delays in product development, construction delays and
unanticipated costs. There can be no assurance as to if and when a successful
golf ball product will be developed or that the Company's investments will
ultimately be realized.
The Company's golf ball business is still in the developmental stage and,
by plan, has had a significant negative impact on the Company's cash flows and
results of operations and will continue to do so during 1999. The Company
believes that many of the same factors that affect the golf equipment industry,
including growth rate in the golf equipment industry, intellectual property
rights of others, seasonality and new product introductions, also apply to the
golf ball business.
SALES AND MARKETING
Sales for Distribution in the United States
Approximately 62%, 65% and 68% of the Company's net sales were derived from
sales for distribution within the United States in 1998, 1997 and 1996,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1998, 1997, and 1996. The Company
distributes its products in Hawaii through an exclusive distributor.
The Company, through its subsidiary Callaway Golf Sales Company, currently
employs full-time regional field representatives, in-house telephone
salespersons and customer service representatives in connection with golf club
and accessory sales. Each geographic region is covered by both a field
representative and a telephone salesperson who work together to initiate and
maintain relationships with customers through frequent telephone calls and in-
person visits. The Company believes that this tandem approach of utilizing
field representatives and telephone salespersons provides the Company a
competitive advantage over other golf club manufacturers that distribute their
golf clubs solely through independent sales representatives rather than
employees. Notwithstanding the foregoing, Callaway Golf recognizes that other
companies have marketing programs which may be equally or more effective than
its own strategy.
Some quantities of the Company's products find their way to unapproved
outlets or distribution channels. This "gray market" in the Company's products
can undermine authorized retailers and foreign wholesale distributors who
promote and support the Company's products, and can injure the Company's image
in the minds of its customers and consumers. On the other hand, stopping such
commerce could result in a potential decrease in sales to those customers who
are selling Callaway Golf products to unauthorized distributors and/or an
increase in sales returns over historical levels. For example, the Company
experienced a decline in sales in the United States in 1998, and believes the
decline was due, in part, to a decline in "gray market" shipments to Asia and
Europe. While the Company has taken some lawful steps to limit commerce in its
products in the "gray market" in both domestic and international markets, it has
not stopped such commerce.
7
Sales for Distribution Outside of the United States
Approximately 38%, 35% and 32% of the Company's net sales were derived from
sales for distribution outside of the United States in 1998, 1997 and 1996,
respectively. In 1997 and 1996, the majority of the Company's international
sales were made through distributors specializing in the sale and promotion of
golf clubs in specific countries or regions around the world. In 1998, the
majority of the Company's international sales were made through its foreign
subsidiaries. The Company currently has distribution arrangements covering sales
of the Company's products in over 50 foreign countries, including Japan,
Singapore, Spain, Italy, Hong Kong, Australia, Argentina and South Africa.
Prices of golf clubs for sales outside of the United States receive an export
pricing discount to compensate international distributors for selling,
advertising and distribution costs. A change in the Company's relationship with
significant distributors could negatively impact the volume of the Company's
international sales.
Prior to April 1998, the Company distributed its products in Canada through
a distributor. In April 1998, the Company purchased the distribution rights of
its Canadian distributor and began directly marketing its products in that
country through its subsidiary, Callaway Golf Canada Ltd.
In 1998, the Company directly marketed its products in the United Kingdom,
Belgium, Finland, Denmark and Sweden through its wholly-owned British
subsidiary, Callaway Golf Europe Ltd. ("CG Europe") (formerly Callaway Golf (UK)
Limited). Through two transactions in 1996 and 1998, the Company acquired the
distributor rights of its German distributor, which consist of selling and
promoting the Company's products in Germany, Austria, the Netherlands and
Switzerland. In December 1998, the Company acquired the distribution rights of
its Norwegian distributor and in January 1999 began directly marketing its
products in Norway through CG Europe. In February 1999, the Company acquired
the distribution rights of its Irish distributor and began directly marketing
its products in Ireland through CG Europe. In June 1998, the Company purchased
the distribution rights of its French distributor and began directly marketing
its products in that country through its wholly-owned subsidiary, Callaway Golf
Europe S.A.
Prior to February 1998, the Company distributed its products in Korea
through a distributor. In February 1998, the Company purchased the distribution
rights of its Korean distributor and began directly marketing its products in
that country through its subsidiary, Callaway Golf Korea, Ltd.
In 1993, the Company, through a distributor agreement, appointed Sumitomo
Rubber Industries, Ltd. as the sole distributor, and Sumitomo Corporation as the
sole importer, of Callaway(R) golf clubs in Japan. This distributor agreement
runs through December 31, 1999. The Company does not intend to extend this
agreement. Sales to Sumitomo represented approximately $58.2 million (8%), $83.0
million (10%) and $58.2 million (9%) of the Company's net sales in 1998, 1997
and 1996, respectively. See Note 14 of Notes to Consolidated Financial
Statements in the 1998 Annual Report to Shareholders.
The Company has established ERC International Company, a wholly-owned
Japanese corporation ("ERC"), for the purpose of distributing Odyssey(R)
products in Japan. ERC also will distribute Callaway Golf balls when ready and
Callaway Golf clubs beginning January 1, 2000. There will be significant costs
and capital expenditures invested in ERC before there will be sales sufficient
to support such costs. However, these costs have not been material to date.
Furthermore, there are significant risks associated with the Company's intention
to effectuate distribution in Japan through ERC, and it is possible that doing
so will have a material adverse effect on the Company's operations and financial
performance.
The Company's management believes that controlling the distribution of its
products in selected major markets will be an element in the future growth and
success of the Company. As described above, the Company has been actively
pursuing a reorganization of its international operations, including the
acquisition of distribution rights in certain key countries in Europe, Asia and
North America. These efforts have resulted and will continue to result in
additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. The integration of foreign distribution into the
Company's international sales operations will require the dedication of
management resources which may temporarily detract from attention to the day-to-
day business of the Company.
Additionally, the Company's plan of integration of foreign distribution
increases the Company's exposure to fluctuations in exchange rates for various
foreign currencies which could result in losses and, in turn, could adversely
impact the Company's results of operations. There can be no assurance that the
Company will be able to mitigate this exposure in the future through its
management of foreign currency transactions. International reorganization also
could result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the
8
acquisition of some or all of the Company's foreign distribution will be
successful, and it is possible that an attempt to do so will adversely affect
the Company's business.
As noted above, the Company continues to experience unauthorized
distribution of its products in international markets. For a discussion of the
Company's efforts in this area, see "Sales for Distribution in the United
States" set forth above.
Credit Risk
The Company primarily sells its products to golf equipment retailers and
foreign distributors. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from these
customers. The Company believes it has adequate reserves for potential credit
losses. Historically, the Company's bad debt expense has been low. However, the
recent downturn in the retail golf equipment market has resulted in delinquent
or uncollectible accounts for some of the Company's significant customers. As a
result, during 1998 the Company increased its reserve for credit losses.
Management does not foresee any significant improvement in the golf equipment
market during 1999, and therefore expects this trend to continue. Accordingly,
there can be no assurance that the Company's results of operations or cash flows
will not be adversely impacted by the failure of its customers to meet their
obligations to the Company.
Advertising and Promotion
Within the United States, the Company has focused its advertising efforts
mainly on a combination of television commercials and printed advertisements in
national magazines, such as Golf Digest, Golf Magazine, Golf Week, Golf World
----------- ------------- --------- ----------
and Sports Illustrated's Golf Edition, and in trade publications, such as Golf
--------------------------------- ----
Shop Operations. Advertising of the Company's golf clubs outside of the United
- ---------------
States is typically handled by our subsidiaries and independent distributors
of the products in a particular country.
The Company also establishes relationships with professional golfers in
order to evaluate and promote Callaway Golf branded golf clubs. The Company has
entered into endorsement arrangements with members of the various professional
tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour, the PGA
European Tour and the Nike Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's products
despite contractual commitments. To date, the Company believes that the
cessation of use by professional endorsers of Callaway(R) brand products has not
resulted in a significant amount of negative publicity. However, if certain of
Callaway Golf's professional endorsers were to stop using the Company's products
contrary to their endorsement agreements, the Company's business could be
adversely affected in a material way by the negative publicity.
Many professional golfers throughout the world use the Company's golf clubs
even though they are not contractually bound to do so. The Company has created
cash "pools" that reward such usage. For the last several years, the Company has
experienced an exceptional level of driver penetration on the world's five major
professional tours, and the Company has heavily advertised that fact. It is
unlikely that the Company will be able to sustain this level of professional
usage in 1999. Many other companies are aggressively seeking the patronage of
these professionals, and are offering many inducements, including specially
designed products and significant cash rewards.
As in past years, during 1998, the Company continued its Big Bertha(R)
Players' Pools ("Pools") for the PGA, Senior PGA, LPGA and Nike Tours. Those
professional players participating in the Pools received cash for using Callaway
Golf products in professional tournaments, but were not bound to use the
products or grant any endorsement to the Company. The Company believes that its
professional endorsements and its Pools contributed to its usage on the
professional tours in 1998. However, in connection with its new business plan
for 1999 the Company has significantly reduced these Pools for the PGA and the
Senior PGA Tours, and has eliminated the Pools for the LPGA and Nike Tours. As a
result, the Company anticipates that the level of professional usage of the
Company's products will be lower in 1999 than 1998. Further, while it is not
clear whether professional endorsements materially contribute to retail sales,
it is possible that a decline in the level of professional usage of the
Company's products could have a material adverse effect on the Company's
business.
To support the promotion of its products at the retail level, the Company
offers various promotional programs to its customers. Golf clubs may be
purchased at a discount for demonstration, loan and rental use and for personal
use by golf shop professionals.
9
The Company's advertising, promotional and endorsement related expenses,
including compensation to professional golfers, were approximately $79.1
million, $62.4 million and $45.0 million, in 1998, 1997 and 1996, respectively.
MANUFACTURING AND SOURCES AND AVAILABILITY OF MATERIALS
The manufacturing of the Company's golf clubs involves a number of
specialized processes required by the unique design of the products. The
Company's metal woods and irons are produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using clubheads, shafts and
grips supplied by independent vendors.
The Company works with a few select casting houses to produce its
clubheads. The clubheads used in the production of Great Big Bertha(R) Hawk
Eye(R) Titanium Drivers and Fairway Woods are manufactured to Callaway Golf's
specifications by Cast Alloys, Inc. ("Alloys"), Coastcast Corporation
("Coastcast") and Sturm, Ruger and Company ("Sturm Ruger"). Coastcast and Alloys
cast Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
clubheads. Biggest Big Bertha(R) Titanium Driver clubheads are provided by
Alloys, Coastcast and Sturm Ruger. Big Bertha(R) X-12 Iron clubheads are
provided by Hitchiner Manufacturing Co. and Coastcast. Great Big Bertha(R)
Tungsten.Titanium(TM) Irons are provided by Coastcast. The Company works closely
with its casting houses, which enables the Company to monitor the quality and
reliability of clubhead production. All of these casting houses are currently
manufacturing, or are entitled to manufacture, clubheads for competitors of the
Company. The Company also works closely with Aldila, FM Precision, Fujikura,
Graphite Design, Inc., HST, Suntech-Sunwoo Co, Ltd., True Temper and Unifiber,
its principal suppliers of shafts, to develop specialized shafts suited to the
S2H2(R) design and the other unique features of the Company's products.
The Company is dependent on a limited number of suppliers for its clubheads
and shafts. In addition, some of the Company's products require specifically
developed manufacturing techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. The Company believes that
suitable clubheads and shafts could be obtained from other manufacturers in the
event its regular suppliers are unable to provide components. However, any
significant production delay or disruption caused by the inability of current
suppliers to deliver or the transition to other suppliers could have a material
adverse impact on the Company's results of operations.
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its domestic customers. The Company is continually
reviewing alternative methods of ground shipping to supplement its use and
reduce its reliance on UPS. To date, a limited source of alternative vendors
have been identified and adopted by the Company. Nevertheless, any interruption
in UPS services could have a material adverse effect on the Company's sales and
results of operations.
The Company's size has made it a large consumer of certain materials,
including titanium and carbon fiber. Callaway Golf does not make these materials
itself, and must rely on its ability to obtain adequate supplies in the world
marketplace in competition with other users of such materials. While the Company
has been successful in obtaining its requirements for such materials thus far,
there can be no assurance that it will always be able to do so. An interruption
in the supply of such materials or a significant change in costs could have a
material adverse effect on the Company.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
Handling of Materials
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. As a standard procedure, a comprehensive audit of the treatment,
storage, and disposal facility with which the Company contracts for the disposal
of hazardous waste is performed annually by the Company. To date, the Company
has not experienced any material environmental compliance problems, although
there can be no assurance that such problems will not arise in the future.
10
PRODUCT WARRANTIES
The Company supports all of its golf clubs with a limited two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. In addition, the
Company's Biggest Big Bertha(R) Drivers, because of their large clubhead size
and extra long, lightweight graphite shafts, have experienced shaft breakage at
a rate higher than generally experienced with the Company's other metal woods,
even though these shafts are among the most expensive to manufacture in the
industry. While any breakage or warranty problems are deemed significant to the
Company, the incidence of clubs returned as a result of cracked clubheads,
broken graphite shafts, loose medallions and other product problems to date has
not been material in relation to the volume of Callaway Golf clubs that have
been sold. The Company monitors closely the level and nature of any product
breakage and, where appropriate, seeks to incorporate design and production
changes to assure its customers of the highest quality available in the market.
Significant increases in the incidence of breakage or other product problems may
adversely affect the Company's sales and image with golfers. At December 31,
1998, 1997 and 1996, the Company's reserves for warranty claims were
approximately $35.8 million, $28.1 million, and $27.3 million, respectively.
While the Company believes that it has sufficient reserves for warranty claims,
there can be no assurance that these reserves will be sufficient if the Company
were to experience an unusually high incidence of breakage or other product
problems.
INTELLECTUAL PROPERTY
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents and trademark registrations, the maintenance of trade secrets,
the development of trade dress, and, when necessary and appropriate, litigation
against those who are, in the Company's opinion, unfairly competing. In the
United States, the Company has applied for or been granted patents for certain
features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway(R), Big Bertha(R), Great Big Bertha(R), Hawk Eye(R),
S2H2(R), Odyssey(R), Stronomic(R) and several other product names. There is no
assurance that during the life of a patent or a trademark, prior to a court of
competent jurisdiction validating them, any of these patents or trademarks are
enforceable, although the Company believes them to be enforceable.
The golf club industry, in general, has been characterized by widespread
imitation of popular club designs. The Company has an active program of
enforcing its proprietary rights against companies and individuals who market or
manufacture counterfeits and "knock off" products, and aggressively asserts its
rights against infringers of its copyrights, patents, trademarks, and trade
dress. However, there is no assurance that these efforts will reduce the level
of acceptance obtained by these infringers. Additionally, there can be no
assurance that other golf club manufacturers will not be able to produce
successful golf clubs which imitate the Company's designs without infringing any
of the Company's copyrights, patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark, copyright or other protection of
their proprietary rights and designs. From time to time others have or may
contact the Company to claim that they have proprietary rights that have been
infringed by the Company and/or its products. The Company evaluates any such
claims and where appropriate, has obtained or sought to obtain licenses or other
business arrangements. (See also Item 3, "Legal Proceedings.") To date, there
have been no interruptions in the Company's business as a result of any claims
of infringement. No assurance can be given, however, that the Company will not
be adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
Various patents have been issued to the Company's competitors in the golf
ball industry. As Callaway Golf Ball Company develops a new golf ball product,
it must avoid infringing these patents or other intellectual property rights, or
it must obtain licenses to use them lawfully. If any new golf ball product is
found to infringe on protected technology, the Company could incur substantial
costs to redesign its golf ball product or to defend legal actions. Despite its
efforts to avoid such infringements, there can be no assurance that Callaway
Golf Ball Company will not infringe on the patents or other intellectual
property rights of third parties in its development efforts, or that it will be
able to obtain licenses to use any such rights, if necessary.
11
The Company has stringent procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for
dissemination of information and written confidentiality agreements with
employees and vendors. Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements. There can be no
assurance that these measures will prove adequate in all instances to protect
the Company's confidential information.
LICENSING
Through a licensing arrangement with Jonesheirs, Inc., Callaway
Golf obtained the exclusive, worldwide rights to the use of the Bobby Jones(R)
name for golf clubs and golf-related accessories through 2010. The Company
receives a royalty from the Hickey-Freeman Company on sales of Bobby Jones(R)
Sportswear and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel in the
U.S. at its own expense under the "Callaway Golf Apparel by Nordstrom" label.
The licensing agreement runs through 2004 with automatic one-year extensions
unless terminated by either party. The line includes men's and women's golf
apparel, golf footwear and certain other products and is sold at Nordstrom
stores throughout the United States.
In 1997, Callaway Golf and Bausch & Lomb Incorporated signed a multi-year
agreement to jointly develop and globally market an exclusive line of premium
sunglasses specifically for golf enthusiasts. The sunglasses and sunglass
cases, co-branded with the Ray-Ban(R), Callaway Golf(R) and Callaway(R) marks,
were introduced in 1999 and are available through golf pro shops and other
retailers of premium golf equipment, better sporting goods and better department
stores, sunglass specialty shops and optical channels.
SEASONALITY
In the golf equipment industry, sales to retailers are generally seasonal
due to lower demand in the retail market in the cold weather months covered by
the fourth and first quarters. The Company's business generally follows this
seasonal trend and the Company expects this to continue. Unusual or severe
weather conditions such as the "El Nino" weather patterns experienced during the
winter of 1997-1998 may compound these seasonal effects.
COMPETITION
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names, as well as new companies with popular products. With
respect to metal woods, the Company's major domestic competitors are Taylor
Made, Titleist, Cobra and Ping. In 1998, Orlimar and Adams emerged as new
competitors. With respect to irons, the Company's major domestic competitors
are Titleist, Cobra, Taylor Made and Ping. For putters, the Company's major
domestic competitors are Ping and Titleist. New product introductions and/or
price reductions by competitors continue to generate increased market
competition and the Company believes that such competition has caused it to lose
some unit market share and has negatively affected sales. While the Company
believes that its products and its marketing efforts continue to be competitive,
there can be no assurance that successful marketing activities by competitors
will not negatively impact the Company's future sales.
A manufacturer's ability to compete is in part dependent upon its ability
to satisfy the various subjective requirements of golfers, including the golf
club's look and "feel," and the level of acceptance that the golf club has among
professional and other golfers. The subjective preferences of golf club
purchasers also may be subject to rapid and unanticipated changes. There can be
no assurance as to how long the Company's golf clubs will maintain market
acceptance. For example, consumer support for shallow-faced metal woods
increased in 1998, and many of the Company's competitors are making such
products. The Company does not currently make a "shallow-faced" wood, and does
not believe that the designs currently in the market are superior to its deeper-
faced offerings. However, if "shallow-faced" products continue to gain consumer
acceptance, the Company's sales could continue to be negatively affected.
As noted elsewhere in this Report, the Company has formed Callaway Golf
Ball Company for the purpose of creating, developing and manufacturing golf
balls. The golf ball business is highly competitive with a number of well-
established and well-financed competitors, including Titleist, Spalding,
Sumitomo Rubber Industries, Bridgestone and
12
others. These competitors have established market share in the golf ball
business, that the Company will need to penetrate in order for the Company's
golf ball business to be successful.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had 2,252 full-
time employees, including 277 employed in sales and marketing, 199 employed in
research and development and product engineering and 1,226 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
ITEM 2. PROPERTIES.
The Company and its subsidiaries conduct operations in both owned and
leased properties, located primarily near the Company's headquarters in
Carlsbad, California. The 12 buildings utilized in the Company's Carlsbad
operations include corporate offices, manufacturing, research and development,
warehousing and distribution facilities, and comprise approximately 881,000
square feet of space. Nine of these properties, representing approximately
644,000 square feet of space are owned by the Company; an additional three
properties, representing approximately 237,000 square feet of space, are leased.
These properties include a golf ball manufacturing plant currently under
construction for its wholly-owned subsidiary, Callaway Golf Ball Company. In
addition, the Company and its subsidiaries conduct certain international
operations outside of the United States, located in the United Kingdom, Canada,
Japan and Korea, in leased facilities comprising approximately 92,628 square
feet.
As part of its restructuring plan, the Company plans to sell certain of its
buildings, which house a portion of its manufacturing and research and
development activities. The Company believes that its facilities currently are
adequate to meet its requirements and will continue to be following the
consummation of the sales.
ITEM 3. LEGAL PROCEEDINGS.
The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the intellectual property laws of various countries,
including, for example, the United States Lanham Act, the U.S. Patent Act, and
other pertinent laws. Some defendants in these actions have, among other
things, contested the validity and/or the enforceability of some of the
Company's patents and/or trademarks. Others have asserted counterclaims against
the Company. The Company believes that the outcome of these matters
individually and in the aggregate will not have a material adverse effect upon
the financial position or results of operations of the Company. It is possible,
however, that in the future one or more defenses or claims asserted by
defendants in one or more of those actions may succeed, resulting in the loss of
all or part of the rights under one or more patents, loss of a trademark, a
monetary award against the Company, or some other loss to the Company. One or
more of these results could adversely affect the Company's overall ability to
protect its product designs and ultimately limit its future success in the
marketplace.
In addition, the Company from time to time receives information claiming
that products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
The Company and its subsidiaries, incident to their business activities,
are parties to a number of legal proceedings, lawsuits and other claims,
including those discussed above. Such matters are subject to many uncertainties
and outcomes are not predictable with assurance. Consequently, management is
unable to ascertain the ultimate aggregate amount of monetary liability, amounts
which may be covered by insurance, or the financial impact with respect to these
matters. However, management believes that the final resolution of these
matters, individually and in the aggregate, will not
13
have a material adverse effect upon the Company's annual consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information concerning certain of the Company's officers is
set forth below.
Name Age Position(s) Held
- -------------------------- -------- -------------------------------------------------------------------------
Ely Callaway.............. 79 Founder, Chairman, President and Chief Executive Officer
Ronald A. Drapeau......... 52 Senior Executive Vice President, Manufacturing
Richard C. Helmstetter.... 57 Senior Executive Vice President, Chief of New Golf Club Products
Steven C. McCracken....... 48 Executive Vice President, Licensing, Chief Legal Officer and Secretary
Bruce Parker.............. 43 Senior Executive Vice President, U.S. Sales, and Chief Merchant
Frederick R. Port......... 57 Senior Executive Vice President, International Sales
David A. Rane............. 44 Executive Vice President, Administration and Planning, and Chief
Financial Officer
Charles J. Yash........... 50 Senior Executive Vice President, Golf Balls
Ely Callaway, Founder, has served as President and Chief Executive Officer
since October 1998, and also has served as Chairman of the Board of the Company
since the Company's formation in 1982. Mr. Callaway also currently serves as
Chairman of the Executive and Compensation Committee, and as Chairman of the
Company is a non-voting advisor of all other Board committees. He served as
Chief Executive Officer from 1982 to May 1996, and Chief of Advertising, Press
and Public Relations from April 1997 to October 1998. From 1974 to 1981, Mr.
Callaway founded and operated Callaway Vineyard and Winery in Temecula,
California, until it was sold. From 1946 to 1973, Mr. Callaway worked in the
textile industry, where he served as a Divisional President of several major
divisions of Burlington Industries, Inc., and in 1968 was elected Corporate
President and Director of Burlington, which at the time was the world's largest
textile company. Prior to 1945, Mr. Callaway served a five-year tour of duty in
the U.S. Army Quartermaster Corps. Mr. Callaway is a 1940 graduate of Emory
University.
Ronald A. Drapeau has served as Senior Executive Vice President,
Manufacturing, since February 1999 and as President and Chief Executive Officer
of Odyssey Golf, Inc., a wholly-owned subsidiary of the Company since August
1997. Mr. Drapeau served as Executive Vice President of the Company from August
1997 to February 1999, and served as a consultant to the Company from November
1996 to August 1997. From April 1993 to September 1996, Mr. Drapeau served as
Chief Executive Officer of Lynx Golf, Inc., a subsidiary of Zurn Industries,
Inc., and served as Senior Vice President and Chief Financial Officer of Zurn
Industries, Inc. from 1992 to 1993. He is a 1969 graduate of Bentley College.
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Golf Club Products since February 1998 and as Senior
Executive Vice President, Chief of New Products from 1993 to February 1998. Mr.
Helmstetter served as President from 1990 to 1993 and as Executive Vice
President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as
President of Adam Ltd., a pool cue manufacturing and merchandising company which
he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also
consulted extensively for several Japanese, European and American companies,
including Bridgestone Corporation's strategic planning group. Mr. Helmstetter
is a 1966 graduate of the University of Wisconsin.
14
Steven C. McCracken has served as Executive Vice President, Licensing and
Chief Legal Officer since April 1997 and as Secretary since April 1994. He has
served as an Executive Vice President since April 1996 and served as General
Counsel from April 1994 to April 1997. He served as Vice President from April
1994 to April 1996. Prior to joining the Company, Mr. McCracken was a partner
at Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of
law for over 18 years. During part of that period, he provided legal services
to the Company. Mr. McCracken received a B.A., magna cum laude, from the
University of California at Irvine in 1972 and a J.D. from the University of
Virginia in 1975.
Bruce Parker has served as a Director of the Company since July 1996,
Senior Executive Vice President, U.S. Sales, since 1993 and Chief Merchant since
1991. He has held the office of President and Chief Executive Officer of
Callaway Golf Sales Company, the Company's wholly-owned U.S. sales subsidiary,
since 1995 and 1997, respectively. Mr. Parker also has served the Company in
various vice presidential positions since 1984 and became Executive Vice
President, Chief Merchant in October 1991. Prior to 1984, Mr. Parker worked as
a sales manager for various golf club manufacturers in California.
Frederick R. Port has served as Senior Executive Vice President,
International Sales since April 1997 and as a Director since October 1995. He
has held the position of President of Callaway Golf International, the
International Sales Division of the Company, since 1996 and President of ERC
International Company since October 1998. He served as Executive Vice
President, International Sales, Licensing and Business Development of the
Company from April 1996 to April 1997. He served as Executive Vice President,
Business Development, of the Company from September 1995 to April 1996. From
1993 to 1995, Mr. Port was the Managing Director of Korn/Ferry International for
the Southern California region (an executive recruiting and strategic consulting
firm). From 1987 to 1992, he was the President and a Director of the Owl
Companies (a company providing military base services management, construction
materials production and sale, industrial and commercial real estate development
and power development). Prior to that, he served with several companies in a
variety of executive positions, including Chairman, Chief Executive Officer and
Director of Santa Anita Development Corporation, Vice President, Finance and
Asset Management, of the Victor Palmieri Company and consultant for Booz, Allen
and Hamilton. Mr. Port served as an infantry officer in the United States Army.
He is a 1963 graduate of UCLA and received his MBA with honors from UCLA in
1966.
David A. Rane has served the Company as Executive Vice President,
Administration and Planning, since October 1997 and as Chief Financial Officer
since January 1994. He has served as an Executive Vice President since April
1996, and served as Vice President from January 1994 to April 1996 and as
Director of Investor Relations from June 1993 to January 1994. Prior to 1993,
Mr. Rane was a senior manager for the accounting firm of Price Waterhouse LLP
(now PricewaterhouseCoopers LLP), and served a total of 14 years in public
accounting. Mr. Rane is a 1978 graduate of Brigham Young University.
Charles J. Yash has served as a Director of the Company since July 1996,
Senior Executive Vice President of the Company since February 1999, and as
President and Chief Executive Officer of Callaway Golf Ball Company, a wholly-
owned subsidiary of the Company, since June 1996. Mr. Yash served as an
Executive Vice President of the Company from February 1998 to February 1999.
From 1992 to June 1996, Mr. Yash was President and Chief Executive Officer and a
Director of Taylor Made Golf Company. From 1979 to 1992, Mr. Yash was employed
in various marketing positions with the golf products division of Spalding
Sports Worldwide, including Corporate Vice President and General Manager-Golf
Products, from 1988 to 1992. From 1970 to 1975, Mr. Yash served in the United
States Navy in various positions. Mr. Yash completed the Advanced Executive
Program at the University of Massachusetts in 1982, received his M.B.A. in 1977
from Harvard Business School and graduated with a Bachelor of Science degree
from the U.S. Naval Academy in 1970.
The Company has employment agreements with Messrs. Callaway, Parker,
McCracken, Port and Rane for terms commencing January 1, 1997 and ending
December 31, 1999. The Company also has an employment agreement with Mr. Yash
that commenced May 15, 1996 and ends on May 14, 2001, and Mr. Drapeau which
commenced August 11, 1997 and ends on December 31, 1999. The Company has a
three-year employment agreement with Mr. Helmstetter commencing January 1, 1998
which may be extended by either the Company or Mr. Helmstetter until as late as
December 31, 2012.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to Item 5 is contained on page 39 of the Company's
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to Item 6 is contained on page 7 of the Company's
1998 Annual Report to Shareholders, which information is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Information in response to Item 7 is contained on pages 8 through 18 of the
Company's 1998 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to Item 8 is contained on pages 19 through 39 of
the Company's 1998 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information concerning the Company's executive officers is included
under the caption "Executive Officers of the Registrant" following Part I, Item
4. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and greater than 10% shareholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of Company securities with the Securities and Exchange Commission and the
New York Stock Exchange. Based solely on its review of copies of such forms and
such written representations regarding compliance with such filing requirements
as were received from its executive officers, directors and greater than 10%
shareholders, the Company believes that all such Section 16(a) filing
requirements were complied with during 1998.
Other information required by Item 10 has been included in the Company's
definitive proxy statement under the caption "Election of Directors," as filed
with the Securities and Exchange Commission (the "Commission") on April 1, 1999
pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as Exhibits 10.13 to 10.17
to this Report. Information required by Item 11 has been included in the
Company's definitive proxy statement under the captions "Compensation of
Executive Officers," "Report of the Executive and Compensation Committee of the
Board of Directors on Executive Compensation," "Performance Graph" and "Election
of Directors," as filed with the Commission on April 1, 1999 pursuant to
Regulation 14A, which information is incorporated herein by reference.
16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 has been included in the Company's
definitive proxy statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on April 1, 1999 pursuant
to Regulation 14A, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 has been included in the Company's
definitive proxy statement under the caption "Certain Transactions," as filed
with the Commission on April 1, 1999 pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of Callaway Golf Company and its subsidiaries included
in Part II, Item 8, are incorporated by reference from pages 19
through 39 of the 1998 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Operations for the three years ended
December 31, 1998
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998
Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial Statement
Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits.
3.1.1 Restated Articles of Incorporation of the Company.(2)
3.1.2 Certificate of Amendment of Articles of Incorporation,
effective February 10, 1995.(3)
3.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior
Participating Preferred Stock.(4)
3.3 Bylaws of the Company (as amended through May 10,
1996).(8)
4.1 Dividend Reinvestment and Stock Purchase Plan.(1)
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights Agent
dated as of June 21, 1995.(4)
17
Executive Compensation Contracts/Plans
--------------------------------------
10.1 Chairman and Founder Employment Agreement by and
between the Company and Ely Callaway entered into as
of January 1, 1997.(14)
10.2 Chief Executive Officer Employment Agreement by and
between the Company and Donald H. Dye entered into as
of January 1, 1997.(16)
10.3 Executive Officer Employment Agreement by and between
the Company and Bruce Parker entered into as of
January 1, 1997.(12)
10.4 Executive Officer Employment Agreement by and between
the Company and Richard Helmstetter entered into as of
January 1, 1998.(17)
10.5 Executive Officer Employment Agreement by and between
the Company and John Duffy entered into as of January
1, 1997.(12)
10.6 Executive Officer Employment Agreement by and between
the Company and Steven C. McCracken entered into as of
January 1, 1997.(12)
10.7.1 Executive Officer Employment Agreement by and between
the Company and Frederick R. Port entered into as of
January 1, 1997.(12)
10.7.2 Stock Option Agreement by and between the Company and
Frederick R. Port dated as of September 1, 1995.(5)
10.8 Executive Officer Employment Agreement by and between
the Company and David Rane entered into as of January
1, 1997.(12)
10.9.1 Officer Employment Agreement by and between the
Company and Charles Yash entered into as of May 15,
1996.(10)
10.9.2 Stock Option Agreement by and between the Company and
Charles J. Yash dated as of May 10, 1996.(9)
10.10.1 Agreement between the Company and Donald H. Dye dated
as of October 15, 1998.+
10.10.2 Consulting Agreement between the Company and Donald H.
Dye dated as of October 15, 1998. +
10.11.1 Form of Tax Indemnification Agreement.(4)
10.11.2 Amendment No. 1 to Form of Tax Indemnification
Agreement.(11)
10.12 Executive Deferred Compensation Plan (as amended and
restated, effective January 1, 1998).(18)
10.13 Callaway Golf Company Executive Non-Discretionary
Bonus Plan.(13)
10.14 1991 Stock Incentive Plan (as amended and restated
April 1994).(3)
10.15 Amended and Restated Stock Option Plan effective April
2, 1991.(7)
10.16 1996 Stock Option Plan (as amended and restated
through April 23, 1998).(19)
10.17 Callaway Golf Company 1998 Stock Incentive Plan
effective February 18, 1998.(19)
10.18 Callaway Golf Company Non-Employee Directors Stock
Option Plan (as amended and restated through April 23,
1998).(19)
10.19.1 Form of Indemnification Agreement by and between the
Company and the following directors: William Baker,
Richard Rosenfield, William Schreyer and Michael
Sherwin, all dated January 25, 1995.(3)
10.19.2 Indemnification Agreement by and between the Company
and Ms. Aulana L. Peters, Director, dated July 18,
1996.(12)
10.19.3 Indemnification Agreement by and between the Company
and Vernon E. Jordan, Jr. dated July 16, 1997.(16)
10.19.4 Indemnification Agreement by and between Callaway Golf
Company and Yotaro Kobayashi dated as of June 4,
1998.(19)
Other Contracts
---------------
10.20.1 Loan Agreement by and between the Company and First
Interstate Bank of California dated December 1,
1994.(3)
10.20.2 Amended and Restated Revolving Credit Note made by the
Company in the principal amount of $50,000,000 and
payable to First Interstate Bank of California, dated
December 1, 1995 and First Amendment to Loan Agreement
by and between the Company and First Interstate Bank
of California dated December 1, 1995.(8)
10.20.3 Extension of Amended and Restated Revolving Credit
Note dated December 11, 1997.(17)
10.20.4 Revolving Loan Agreement, dated February 4, 1998 among
Callaway Golf Company, certain lenders therein named
and Wells Fargo Bank, National Association as
Administrative Agent.(18)
18
10.21.1 Credit Agreement dated as of December 30, 1998, among
Callaway Golf Company, the other Credit Parties
signatory thereto, the Lenders signatory thereto from
time to time and General Electric Capital Corporation,
as Agent for the Lenders.(20)
10.21.2 Amended and Restated Credit Agreement dated as of
February 10, 1999, among Callaway Golf Company, as
Borrower, the other credit parties signatory thereto,
as Credit Parties, the Lenders signatory thereto from
time to time and General Electric Capital Corporation,
as Agent and Lender.(21)
10.21.3 Receivables Transfer Agreement dated as of February
10, 1999, by and among Callaway Golf Sales Company and
Odyssey Golf, Inc.(21)
10.21.4 Receivables Transfer Agreement dated as of February
10, 1999, by and among Callaway Golf Company, as
Parent Guarantor, Callaway Golf Sales Company, as the
CGS Originator and as Servicer, and Golf Funding
Corporation.(21)
10.21.5 Receivables Purchase and Servicing Agreement dated as
of February 10, 1999, by and among Golf Funding
Corporation, as Seller, Redwood Receivables
Corporation, as Purchaser, Callaway Golf Sales
Company, as Servicer, and General Electric Capital
Corporation, as Operating Agent and Collateral
Agent.(21)
10.22 Trust Agreement between Callaway Golf Company and
Sanwa Bank California as Trustee, for the benefit of
participating employees, dated July 14, 1995.(6)
10.23 Asset Purchase Agreement dated July 20, 1997 by and
among Callaway Golf Company, Odyssey Sports, Inc. and
U.S. Industries, Inc.(15)
10.24 Operating Agreement for Callaway Golf Media Ventures,
LLC, a California Limited Liability Company, executed
as of January 26, 1998, by and between Callaway Golf
Company and Callaway Editions, Inc.(18)
10.25 Loan Forgiveness Agreement effective as of March 8,
1999, by and among Callaway Golf Company and Callaway
Golf Media Ventures, LLC.+
10.26 Membership Interest Purchase Agreement effective as of
March 8, 1999, by and among Callaway Golf Company and
Callaway Editions, Inc.+
10.27 Loan Termination Agreement effective as of March 10,
1999, by and among Callaway Golf Company and Callaway
Golf Media Ventures, LLC.+
10.28 Trademark License Agreement effective as of March 9,
1999, by and between Callaway Golf Company and
Callaway Golf Media Ventures, LLC.+
13.1 Portions of the Company's 1998 Annual Report to
Shareholders (with the exception of the information
incorporated by reference specifically in this Report
on Form 10-K, the 1998 Annual Report to Shareholders
is not deemed to be filed as a part of this Report on
Form 10-K).+
21.1 List of Subsidiaries.+
23.1 Consent of Independent Accountants.+
27.1 Financial Data Schedule for the Year Ended December
31, 1998.+
+ Included in this Report.
(1) Included as the Prospectus in the Company's
Registration Statement on Form S-3 (No. 33-77024), as
filed with the Securities and Exchange Commission on
March 29, 1994, and incorporated herein by reference.
(2) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-85692), as filed with
the Securities and Exchange Commission on October 28,
1994, and incorporated herein by reference.
(3) Included as an exhibit to the Company's 1994 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1995, and
incorporated herein by reference.
19
(4) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1995, as filed with the Securities and Exchange
Commission on August 12, 1995, and incorporated herein
by reference.
(5) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 33-98750), as filed with
the Securities and Exchange Commission on October 30,
1995, and incorporated herein by reference.
(6) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1995, as filed with the Securities and Exchange
Commission on November 14, 1995, and incorporated
herein by reference.
(7) Included as an exhibit to the Company's 1995 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.
(8) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5719), as filed with
the Securities and Exchange Commission on June 11,
1996, and incorporated herein by reference.
(9) Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5721), as filed with
the Securities and Exchange Commission on June 11,
1996, and incorporated herein by reference.
(10) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1996, as filed with the Securities and Exchange
Commission on August 14, 1996, and incorporated herein
by reference.
(11) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1996, as filed with the Securities and Exchange
Commission on November 13, 1996, and incorporated
herein by reference.
(12) Included as an exhibit to the Company's 1996 Annual
Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1997, and
incorporated herein by reference.
(13) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1997, as filed with the Securities and Exchange
Commission on May 15, 1997, and incorporated herein by
reference.
(14) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1997, as filed with the Securities and Exchange
Commission on August 14, 1997, and incorporated herein
by reference.
(15) Included as an exhibit to the Company's Current Report
on Form 8-K dated August 8, 1997, as filed with the
Securities and Exchange Commission on August 22, 1997,
and incorporated herein by reference.
(16) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997, as filed with the Securities and Exchange
Commission on November 14, 1997, and incorporated
herein by reference.
(17) Included as an exhibit to the Company's Annual Report
on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1998, and
incorporated herein by reference.
(18) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31,
1998, and incorporated herein by reference.
20
(19) Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30,
1998, and incorporated herein by reference.
(20) Included as an exhibit to the Company's Current Report
on Form 8-K dated January 28, 1999, and incorporated
herein by reference.
(21) Included as an exhibit to the Company's Current Report
on Form 8-K dated February 25, 1999, and incorporated
herein by reference.
(b) Reports on Form 8-K:
(1) On October 22, 1998, the Company filed a Current Report on Form
8-K reporting that Donald H. Dye would no longer be serving as
President and Chief Executive Officer or as a director of the
Company. The Company also reported that Ely Callaway, the
Company's Founder and Chairman, would reassume the additional
roles of President and Chief Executive Officer.
(2) On January 28, 1999, the Company filed a Current Report on Form 8-
K reporting that the Company had entered into a credit agreement
on December 30, 1998, providing revolving credit facilities of up
to $75 million (including a $10 million letter of credit
subfacility).
(3) On February 25, 1999, the Company filed a Current Report on Form
8-K reporting that effective February 12, 1999, the Company had
entered into an amended and restated credit agreement which
increased the revolving credit facilities from the original $75
million to up to $120 million. The Company also reported that
effective February 12, 1999, Odyssey Golf, Inc. and Callaway Golf
Sales Company, both wholly-owned subsidiaries of the Company, Golf
Funding Corporation, a newly formed wholly-owned subsidiary of
Callaway Golf Sales Company, and the Company obtained an $80
million accounts receivable securitization facility.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
/s/ ELY CALLAWAY
-------------------------------------
Date: March 31, 1999 Ely Callaway
Founder, Chairman and Chief
Executive Officer
/s/ DAVID A. RANE
-------------------------------------
David A. Rane
Executive Vice President,
Administration and Planning, and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE Title Date
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:
/s/ ELY CALLAWAY Founder, Chairman, and Chief March 31, 1999
--------------------------------------- Executive Officer
Ely Callaway
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ DAVID A. RANE Executive Vice President, March 31, 1999
--------------------------------------- Administration and Planning, and
David A. Rane Chief Financial Officer
OTHER DIRECTORS:
/s/ WILLIAM C. BAKER Director March 31, 1999
---------------------------------------
William C. Baker
/s/ VERNON E. JORDAN, JR. Director March 31, 1999
---------------------------------------
Vernon E. Jordan, Jr.
/s/ YOTARO KOBAYASHI Director March 31, 1999
------------------------------------
Yotaro Kobayashi
/s/ BRUCE PARKER Director March 31, 1999
---------------------------------------
Bruce Parker
/s/ AULANA L. PETERS Director March 31, 1999
---------------------------------------
Aulana L. Peters
/s/ FREDERICK R. PORT Director March 31, 1999
---------------------------------------
Frederick R. Port
/s/ RICHARD ROSENFIELD Director March 31, 1999
---------------------------------------
Richard Rosenfield
/s/ WILLIAM SCHREYER Director March 31, 1999
---------------------------------------
William Schreyer
/s/ CHARLES J. YASH Director March 31, 1999
---------------------------------------
Charles J. Yash
22
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Callaway Golf Company
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1999, except as to Note 16, which is as of February 12, 1999,
appearing on page 38 of the 1998 Annual Report to Shareholders of Callaway Golf
Company (which report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, this Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 26, 1999
23
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
Allowance Allowance Allowance
for Doubtful for Obsolete for Warranty
Date Accounts Inventory Costs
- ------------------------------------------------------------------------------------------------------------
(in thousands)
Balance, December 31, 1995 $ 6,410 $ 4,796 $ 23,769
Provision 231 800 10,735
Write-off (304) (312) (7,201)
Recovery
--------------------------------------------------------
Balance, December 31, 1996 6,337 5,284 27,303
Provision 1,354 743 13,726
Write-off (645) (353) (12,970)
Recovery
--------------------------------------------------------
Balance, December 31, 1997 7,046 5,674 28,059
Provision 4,171 33,214 24,681
Write-off (1,278) (2,040) (16,925)
Recovery
--------------------------------------------------------
Balance, December 31, 1998 $ 9,939 $36,848 $ 35,815
========================================================
24
EXHIBIT INDEX
EXHIBITS
- --------
3.1.1 Restated Articles of Incorporation of the Company.(2)
3.1.2 Certificate of Amendment of Articles of Incorporation, effective
February 10, 1995.(3)
3.2 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series A Junior Participating Preferred Stock.(4)
3.3 Bylaws of the Company (as amended through May 10, 1996).(8)
4.1 Dividend Reinvestment and Stock Purchase Plan.(1)
4.2 Rights Agreement by and between the Company and Chemical Mellon
Shareholder Services as Rights Agent dated as of June 21, 1995.(4)
Executive Compensation Contracts/Plans
--------------------------------------
10.1 Chairman and Founder Employment Agreement by and between the Company
and Ely Callaway entered into as of January 1, 1997.(14)
10.2 Chief Executive Officer Employment Agreement by and between the Company
and Donald H. Dye entered into as of January 1, 1997.(16)
10.3 Executive Officer Employment Agreement by and between the Company and
Bruce Parker entered into as of January 1, 1997.(12)
10.4 Executive Officer Employment Agreement by and between the Company and
Richard Helmstetter entered into as of January 1, 1998.(17)
10.5 Executive Officer Employment Agreement by and between the Company and
John Duffy entered into as of January 1, 1997.(12)
10.6 Executive Officer Employment Agreement by and between the Company and
Steven C. McCracken entered into as of January 1, 1997.(12)
10.7.1 Executive Officer Employment Agreement by and between the Company and
Frederick R. Port entered into as of January 1, 1997.(12)
10.7.2 Stock Option Agreement by and between the Company and Frederick R. Port
dated as of September 1, 1995.(5)
10.8 Executive Officer Employment Agreement by and between the Company and
David Rane entered into as of January 1, 1997.(12)
10.9.1 Officer Employment Agreement by and between the Company and Charles
Yash entered into as of May 15, 1996.(10)
10.9.2 Stock Option Agreement by and between the Company and Charles J. Yash
dated as of May 10, 1996.(9)
10.10.1 Agreement between the Company and Donald H. Dye dated as of October 15,
1998.+
10.10.2 Consulting Agreement between the Company and Donald H. Dye dated as of
October 15, 1998.+
10.11.1 Form of Tax Indemnification Agreement.(4)
10.11.2 Amendment No. 1 to Form of Tax Indemnification Agreement.(11)
10.12 Executive Deferred Compensation Plan (as amended and restated,
effective January 1, 1998).(18)
10.13 Callaway Golf Company Executive Non-Discretionary Bonus Plan.(13)
10.14 1991 Stock Incentive Plan (as amended and restated April 1994).(3)
10.15 Amended and Restated Stock Option Plan effective April 2, 1991.(7)
10.16 1996 Stock Option Plan (as amended and restated through April 23,
1998).(19)
10.17 Callaway Golf Company 1998 Stock Incentive Plan effective February 18,
1998.(19)
10.18 Callaway Golf Company Non-Employee Directors Stock Option Plan (as
amended and restated April 17, 1996).(19)
10.19.1 Form of Indemnification Agreement by and between the Company and the
following directors: William Baker, Richard Rosenfield, William
Schreyer and Michael Sherwin, all dated January 25, 1995.(3)
25
10.19.2 Indemnification Agreement by and between the Company and Ms. Aulana L.
Peters, Director, dated July 18, 1996.(12)
10.19.3 Indemnification Agreement by and between the Company and Vernon E.
Jordan, Jr. dated July 16, 1997.(16)
10.19.4 Indemnification Agreement by and between Callaway Golf Company and
Yotaro Kobayashi dated as of June 4, 1998.(19)
Other Contracts
---------------
10.20.1 Loan Agreement by and between the Company and First Interstate Bank of
California dated December 1, 1994.(3)
10.20.2 Amended and Restated Revolving Credit Note made by the Company in the
principal amount of $50,000,000 and payable to First Interstate Bank of
California, dated December 1, 1995 and First Amendment to Loan
Agreement by and between the Company and First Interstate Bank of
California dated December 1, 1995.(8)
10.20.3 Extension of Amended and Restated Revolving Credit Note dated December
11, 1997.(21)
10.20.4 Revolving Loan Agreement, dated February 4, 1998 among Callaway Golf
Company, certain Lenders therein named and Wells Fargo Bank, National
Association as Administrative Agent.(18)
10.21.1 Credit Agreement dated as of December 30, 1998, among Callaway Golf
Company, the other Credit Parties signatory thereto, the lenders
signatory thereto from time to time and General Electric Capital
Corporation, as Agent for the Lenders.(20)
10.21.2 Amended and Restated Credit Agreement dated as of February 10, 1999,
among Callaway Golf Company, as Borrower, the other credit parties
signatory thereto, as Credit Parties, the Lenders signatory thereto
from time to time and General Electric Capital Corporation , as Agent
and Lender.(21)
10.21.3 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Sales Company and Odyssey Golf, Inc.(21)
10.21.4 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Company, as Parent Guarantor, Callaway Golf Sales
Company, as the CGS Originator and as Servicer, and Golf Funding
Corporation.(21)
10.21.5 Receivables Purchase and Servicing Agreement dated as of February 10,
1999, by and among Golf Funding Corporation, as Seller, Redwood
Receivables Corporation, as Purchaser, Callaway Golf Sales Company, as
Servicer, and General Electric Capital Corporation, as Operating Agent
and Collateral Agent.(21)
10.22 Trust Agreement between Callaway Golf Company and Sanwa Bank California
as Trustee, for the benefit of participating employees, dated July 14,
1995.(6)
10.23 Asset Purchase Agreement dated July 20, 1997 by and among Callaway Golf
Company, Odyssey Sports, Inc. and U.S. Industries, Inc.(15)
10.24 Operating Agreement for Callaway Golf Media Ventures, LLC, a California
Limited Liability Company, executed as of January 26, 1998, by and
between Callaway Golf Company and Callaway Editions, Inc.(18)
10.25 Loan Forgiveness Agreement effective as of March 8, 1999, by and among
Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
10.26 Membership Interest Purchase Agreement effective as of March 8, 1999,
by and among Callaway Golf Company and Callaway Editions, Inc.+
10.27 Loan Termination Agreement effective as of March 10, 1999, by and among
Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
10.28 Trademark License Agreement effective as of March 9, 1999, by and
between Callaway Golf Company and Callaway Golf Media Ventures, LLC.+
13.1 Portions of the Company's 1998 Annual Report to Shareholders (with the
exception of the information incorporated by reference specifically in
this Report on Form 10-K, the 1998 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on Form 10-K).+
21.1 List of Subsidiaries.+
23.1 Consent of Independent Accountants.+
27.1 Financial Data Schedule for the Year Ended December 31, 1998.+
+ Included in this Report.
(1) Included as the Prospectus in the Company's Registration Statement on
Form S-3 (No. 33-77024), as filed with the Securities and Exchange
Commission on March 29, 1994, and incorporated herein by reference.
26
(2) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 33-85692), as filed with the Securities and Exchange
Commission on October 28, 1994, and incorporated herein by reference.
(3) Included as an exhibit to the Company's 1994 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on March 31,
1995, and incorporated herein by reference.
(4) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1995, as filed with the Securities and
Exchange Commission on August 12, 1995, and incorporated herein by
reference.
(5) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 33-98750), as filed with the Securities and Exchange
Commission on October 30, 1995, and incorporated herein by reference.
(6) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1995, as filed with the Securities
and Exchange Commission on November 14, 1995, and incorporated herein
by reference.
(7) Included as an exhibit to the Company's 1995 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on April 1,
1996, and incorporated herein by reference.
(8) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 333-5719), as filed with the Securities and Exchange
Commission on June 11, 1996, and incorporated herein by reference.
(9) Included as an exhibit to the Company's Registration Statement on Form
S-8 (No. 333-5721), as filed with the Securities and Exchange
Commission on June 11, 1996, and incorporated herein by reference.
(10) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, as filed with the Securities and
Exchange Commission on August 14, 1996, and incorporated herein by
reference.
(11) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1996, as filed with the Securities
and Exchange Commission on November 13, 1996, and incorporated herein
by reference.
(12) Included as an exhibit to the Company's 1996 Annual Report on Form 10-
K, as filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference.
(13) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997, as filed with the Securities and
Exchange Commission on May 15, 1997, and incorporated herein by
reference.
(14) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, as filed with the Securities and
Exchange Commission on August 14, 1997, and incorporated herein by
reference.
27
(15) Included as an exhibit to the Company's Current Report on Form 8-K
dated August 8, 1997, as filed with the Securities and Exchange
Commission on August 22, 1997, and incorporated herein by reference.
(16) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, as filed with the Securities
and Exchange Commission on November 14, 1997, and incorporated herein
by reference.
(17) Included as an exhibit to the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on March 31, 1998,
and incorporated herein by reference.
(18) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, and incorporated herein by
reference.
(19) Included as an exhibit to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, and incorporated herein by
reference.
(20) Included as an exhibit to the Company's Current Report on Form 8-K
dated January 28, 1999, and incorporated herein by reference.
(21) Included as an exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, and incorporated herein by reference.
28