SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number ____________
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 Rutherford Road
Carlsbad, CA 92008-8815
(760) 931-1771
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $.01 par value per share New York Stock Exchange
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
As of March 6, 2000, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $1,014,160,323 based on the
closing sales price of the Registrant's Common Stock as reported on the New York
Stock Exchange. Such amount was calculated by excluding all shares held by
directors and executive officers without conceding that all such persons are
"affiliates" of the Registrant for purposes of the federal securities laws.
As of March 24, 2000, the number of shares of the Registrant's Common Stock
outstanding was 76,746,245, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV incorporate certain information by reference from the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1999.
Certain of the information required by Part III is incorporated by
reference from the Registrant's definitive Proxy Statement for the annual
meeting of shareholders to be held on May 3, 2000, as filed with the Commission
on March 29, 2000 pursuant to Regulation 14A, which information is incorporated
herein by reference.
1
Note: Statements used in this report that relate to future plans, events,
financial results or performance are forward-looking statements as defined under
the Private Securities Litigation Reform Act of 1995. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to republish revised forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events. Readers also are urged to
review and consider carefully the various disclosures made by the Company in
Part I of this report which describe certain factors which affect the Company's
business, as well as the Company's other periodic reports on Form 10-Q and
Current Reports on Form 8-K filed with the Securities and Exchange Commission.
Readers also should be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Reports issued by securities analysts are not the
responsibility of the Company and shareholders should not assume that the
Company agrees with any report issued by any analyst or with any statements,
projections, forecasts or opinions contained in such report.
PART I
Item 1. Business.
Callaway Golf Company (the "Company" or "Callaway Golf") was incorporated
in California in 1982 and reincorporated in Delaware on July 1, 1999. The
Company has the following direct wholly-owned operating subsidiaries: Callaway
Golf Sales Company, Callaway Golf Ball Company, CGV, Inc., Callaway Golf Europe
Ltd., Callaway Golf K.K. (formerly ERC International Company), Callaway Golf
Korea Ltd., Callaway Golf (Germany) GmbH and Callaway Golf Canada Ltd. The
Company, together with its subsidiaries, designs, develops, manufactures and
markets high quality, innovative golf clubs and golf balls.
The Company's golf clubs are sold at premium prices to both average and
skilled golfers on the basis of performance, ease of use and appearance.
Callaway Golf's primary golf club products, most of which incorporate the
Company's S2H2(R) design concept, currently include Great Big Bertha(R) Hawk
Eye(R) Titanium Metal Woods and Tungsten Injected(TM) Titanium Irons, Big
Bertha(R) Steelhead Plus(TM) Stainless Steel Metal Woods and Steelhead(TM) X-
14(TM) Stainless Steel Irons, and Bobby Jones(R) and Carlsbad Series(TM)
Putters. Callaway Golf Company also makes and sells Odyssey(R) Putters and
Wedges with Stronomic(R) and Lyconite(R) inserts, including the Dual Force(R)
and TriForce(TM) Putters, and also the White Hot(TM) Putter with an insert
composed of the Rule 35(TM) golf ball cover material.
Callaway Golf Ball Company launched its Rule 35(TM) Firmfeel(TM) and
Softfeel(TM) Golf Balls on February 4, 2000. These balls are sold in the
premium golf ball market to both average and skilled golfers on the basis of
performance and appearance. Both the Firmfeel(TM) and Softfeel(TM) balls are
designed to provide complete performance. Golfers will choose between the two
balls based upon their subjective preference for a firmer or softer feeling golf
ball.
Segments
Information regarding the Company's segments is contained in Note 15 to the
Consolidated Financial Statements ("Consolidated Financial Statements") in the
Company's Annual Report to Shareholders for the year ended December 31, 1999
("1999 Annual Report to Shareholders"), which note is incorporated herein by
reference.
Restructuring
During the fourth quarter of 1998, the Company recorded a restructuring
charge of $54.2 million resulting from a number of cost reduction actions and
operational improvements. These actions included: the consolidation of the
operations of the Company's wholly-owned subsidiary, Odyssey Golf, Inc., into
the operations of the Company while maintaining the distinct and separate
Odyssey(R) brand; the discontinuation, transfer or suspension of certain
initiatives not directly associated with the Company's core business, such as
the Company's involvement with interactive golf sites, golf book publishing, new
player development and a golf venue in Las Vegas; and the re-sizing of the
Company's core business to reflect current and expected business conditions.
These initiatives were completed during 1999, with the exception of cash outlays
related to the assignment of a lease obligation for a facility in New York City
that will continue through July 2000. The restructuring charges (shown below in
tabular format) primarily related to: 1) the elimination of job
responsibilities, resulting in costs incurred for employee severance; 2) the
decision to exit certain non-core business activities, resulting in losses on
disposition of the Company's 80% interest in Callaway Golf Media Ventures (see
Note 14 to the Consolidated Financial Statements), a loss on the sale of the
business of All-American Golf LLC (see Note 14 to the Consolidated Financial
Statements), as well as excess lease
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costs; and 3) consolidation of the Company's continuing operations resulting in
impairment of assets, losses on disposition of assets and excess lease costs.
Employee reductions occurred in almost all areas of the Company, including
manufacturing, marketing, sales, and administrative areas. At December 31, 1998,
the Company had reduced its non-temporary work force by approximately 750
positions. Although substantially all reductions occurred prior to December 31,
1998, a small number of reductions occurred in the first quarter of 1999.
Details of the one-time charge are as follows (in thousands):
Reserve Reserve
Cash/ One-Time Balance Balance
Non-Cash Charge Activity at 12/31/98 Activity(1) at 12/31/99
----------------------------------------------------------------------------------
Elimination of Job Responsibilities $11,664 $ 8,473 $ 3,191 $ 3,191
Severance packages Cash 11,603 8,412 3,191 3,191
Other Non-cash 61 61
Exiting Certain Non-Core Business $28,788 $12,015 $16,773 $15,394 $ 1,379
Activities
Loss on disposition of subsidiaries Non-cash 13,072 10,341 2,731 2,731
Excess lease costs Cash 12,660 146 12,514 11,135(2) 1,379
Contract cancellation fees Cash 2,700 1,504 1,196 1,196
Other Cash 356 24 332 332
Consolidation of Operations $13,783 $ 2,846 $10,937 $10,937
Loss on impairment/disposition of Non-cash 12,364 2,730 9,634 9,634(3)
assets
Excess lease costs Cash 806 4 802 802(4)
Other Cash 613 112 501 501
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes reversal of reserve totaling $8.6 million, as actual amounts
differed from estimates. Significant reversals are noted below in (2)
through (4).
(2) Includes reversal of $6.1 million of reserve due to the assignment of lease
obligation at terms significantly more favorable than estimated at the
establishment of the reserve.
(3) Includes reversal of $1.5 million of reserve related to disposition of two
buildings at higher sales prices than estimated.
(4) Includes reversal of $491,000 of reserve due to the sublease of a facility
at terms more favorable than estimated at the establishment of the reserve.
During 1999, the Company incurred charges of $1.3 million on the
disposition of building improvements eliminated during the consolidation of
manufacturing operations, as well as other charges of $671,000. These charges
did not meet the criteria for accrual in 1998. Additionally, the Company
incurred charges of $749,000 related to asset dispositions and other
restructuring activities for which reserves were not established in 1998. Future
cash outlays are anticipated to be completed by July 2000.
3
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,
---------------------------------------------------------------------------------------
1999 1998 1997
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Metal Woods $429,011 60% $389,900 56% $544,258 64%
Irons 221,303 31% 229,112 33% 233,977 28%
Putters, accessories
and other 64,157 9% 78,609 11% 64,692 8%
---------------------------------------------------------------------------------------
Net Sales $714,471 $697,621 100% $842,927 100%
=======================================================================================
The Company's brands remained number one in the worldwide market for woods,
irons and putters. Sales of the Company's Great Big Bertha(R) Hawk Eye(R)
Titanium Metal Woods, Big Bertha(R) Steelhead(TM) Metal Woods and Big Bertha(R)
X-12(R) Irons were strong in 1999. Great Big Bertha(R) Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons were introduced in September 1999, and Big Bertha(R)
Steelhead Plus(TM) Drivers and Fairway Woods and Big Bertha(R) Steelhead(TM)
X-14(TM) Irons were released in January 2000. The initial acceptance of these
products has also been strong to date. No assurances can be given, however, that
the demand for these products or the Company's other existing products, or the
introduction of new products, will permit the Company to experience growth in
sales, or maintain historical levels of sales, in the future.
The Company's principal products are as follows:
Metal Woods
Big Bertha(R) Steelhead Plus(TM) Drivers and Fairway Woods
In January 2000, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and
Fairway Woods, which were based upon and designed to replace the Company's Big
Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods. The new Big
Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and Fairway Woods
incorporate the Company's proprietary Variable Face Thickness Technology. This
technology allows the Company to make the clubface both thinner and more durable
by engineering precise thicknesses at special points across the interior surface
of the face area, which increases the efficiency of the clubhead at impact to
maximize ball speed. The new clubs also contain a new forged crown plate which
lowers the center of gravity in each club. The Company's exclusive Weight Chips
have also been repositioned in the new clubs to calibrate the center of gravity
for maximum performance. The Company offers the Big Bertha(R) Steelhead Plus(TM)
Stainless Steel Drivers in lofts ranging from 6 to 12 degrees. Big Bertha(R)
Steelhead Plus(TM) Stainless Steel Fairway Woods are available in a 2-wood (The
Deuce(R)), Strong 3-wood, 3-wood, Strong 4-wood, 4-wood, 5-wood, 7-wood
(HeavenWood(R)), and 9-wood (Divine Nine(9)), and 11-wood (Ely Would(R)).
Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
In January 1999, the Company introduced and began delivery of significant
quantities of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway
Woods. Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods were
designed to replace the Company's Great Big Bertha(R) and Biggest Big Bertha(R)
Titanium Drivers and Fairway Woods. Great Big Bertha(R) Hawk Eye(R) Titanium
Drivers and Fairway Woods incorporate a thin titanium crown plate together with
a strong, lightweight titanium body. This design includes a new Tungsten Gravity
Screw that is inserted into the sole of the clubhead and produces a low and deep
center of gravity. The Company offers Great Big Bertha(R) Hawk Eye(R) Titanium
Drivers in lofts ranging from 6 to 12 degrees. Great Big Bertha(R) Hawk Eye(R)
Titanium Fairway Woods are available in a 2-wood (The Deuce(R)), Strong 3-wood,
3-wood, Strong 4-wood, 4-wood, 5-wood, 7-wood (HeavenWood(R)), and 9-wood
(Divine Nine(R)).
Big Bertha(R) Steelhead(TM) Stainless Steel Drivers and Fairway Woods
In August 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R)Steelhead (TM)Stainless Steel Drivers and Fairway
Woods. Big Bertha(R) Steelhead (TM)Stainless Steel Drivers and Fairway Woods
were designed to replace the Company's Big Bertha(R) Stainless Steel Drivers and
Fairway Woods with the War Bird(R) soleplate. The Big Bertha(R) Steelhead(TM)
Stainless Steel Drivers and Fairway Woods were superseded in January 2000 by the
Company's new Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and
Fairway Woods (discussed above).
4
Biggest Big Bertha(R) Titanium Driver
In January 1997, the Company introduced Biggest Big Bertha(R) Titanium
Drivers. Biggest Big Bertha(R) Titanium Drivers were superseded by the Company's
Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods (discussed
above) in January 1999.
Irons
Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons
In January 2000, the Company introduced and began delivery of significant
quantities of Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons, which
were based upon and designed to replace the Big Bertha(R) X-12(R) Irons. The new
Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons incorporate the
Company's proprietary Variable Face Thickness Technology. This technology allows
the Company to cast the irons with less material in the face area which in turn
allows the Company to move more free weight to other areas of the clubhead. In
the long irons, this extra weight was placed in the sole of the clubhead to
create a lower center of gravity for greater ease in getting the ball airborne.
In the short irons and wedges, the weight was shifted slightly higher to provide
increased control and additional backspin for precise approach shots. These
irons are offered in 1 through 9, and pitch, approach, sand, and lob wedges.
Hawk Eye(R) Tungsten Injected(TM) Titanium Irons
In September 1999, the Company introduced its Hawk Eye(R) Tungsten
Injected(TM) Titanium Irons, which were designed to replace the Company's
previous line of Great Big Bertha(R) Tungsten.Titanium(TM) Irons. The new Hawk
Eye(R) Tungsten Injected(TM) Titanium Irons are injected with the Company's
Tungsten Weight Matrix, which is a mixture of tungsten and other materials that
creates a precisely placed, extremely low center of gravity to help golfers hit
shots with optimum trajectory and maximum forgiveness. These irons are offered
in 1 through 9, and pitch, approach, sand, and lob wedges.
Big Bertha(R) X-12(R) Irons
In January 1998, the Company introduced and began delivery of significant
quantities of Big Bertha(R) X-12(R) Irons. Big Bertha(R) X-12(R) Irons
incorporate a low center of gravity which helps get the ball airborne more
easily with the proper trajectory and spin. Using the Company's exclusive
proprietary varied 360-degree undercut channel creates a thinner profile, and
together with a new shape and a narrower sole, keeps the center of gravity low.
The unique multi-layer design in the cavity allows for increased forgiveness on
off-center hits. These irons are offered in 1 through 9, and pitch, approach,
sand, and lob wedges. They are also offered in a reduced offset version. With
the exception of the reduced offset version, these irons have been replaced by
the Company's Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons. The
Company expects to continue selling the reduced offset version of the Big
Bertha(R) X-12(R) Irons.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons
In January 1997, the Company introduced Great Big Bertha(R)
Tungsten.Titanium(TM) Irons. In 1999, these irons were superseded by the Hawk
Eye(R) Tungsten Injected(TM) Titanium Irons.
Putters
The Company has various lines of putters, including the Odyssey(R) line of
putters and the Callaway Golf(R) line of putters. Odyssey(R) Putters sold by the
Company incorporate a soft, polymer trapezoidal insert designed to provide
better feel and forgiveness. The Odyssey(R) line of putters include the new
White Hot(Tm) Putters introduced in February 2000, the TriForce(TM) Putters
introduced in 1999, and the Dual Force(R) Blade-Style Putters, which are also
available in the Rossie(TM) Mallet Style Putter. The TriForce(TM) and Dual Force
Putters incorporate a Stronomic(R) Insert(R) that is available in black, green
and blue. The new White Hot(TM) Putters feature a white high-performance insert
made from the proprietary cover material of the Company's new golf balls. The
center of gravity in the TriForce(TM) series of putters has been moved back and
away from the face, which creates better ball roll than similarly-shaped clubs.
This weight distribution is achieved through having the largest Stronomic(R)
insert of any Odyssey(R) putter to date, coupled with a heavy, milled tungsten
flange. The Company also has a Callaway Golf(R) line of steel and graphite
shafted traditional non-insert putters, including the new Carlsbad Series(TM)
putters and Bobby Jones(R) Putters.
5
Some of these putters incorporate the S2H2(R) concept, including The Tuttle(R)
and The Tuttle(R) II putters.
Golf Balls
On February 4, 2000, Callaway Golf Ball Company introduced its highly
anticipated new golf balls. The golf balls, named "Rule 35(TM)" come in two
models - Firmfeel(TM) and Softfeel(TM). The Company blended distance, control,
spin and durability into one golf ball providing "Complete Performance (TM)".
The primary difference between the two models is that one is designed for
players who prefer a firmer golf ball and the other is designed for players who
prefer a softer golf ball. The balls are offered in a five-ball sleeve and a
ten-ball pack. The Company expects also to offer the balls in a twenty-pack
later in 2000.
Accessories
In addition to its golf clubs and balls, Callaway Golf offers golf-
related equipment and supplies manufactured by other companies bearing the
Company's trademarks, including golf bags, travel bags, head covers, hats,
umbrellas and other accessories.
Product Design and Development
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. In 1999, 1998 and 1997, the Company expended
on research and development $34,002,000, $36,848,000 and $30,298,000,
respectively. The Company intends to continue to invest substantial amounts in
its research and development activities in 2000 and beyond. In addition to
development of new golf club equipment, these investments will continue to
include, among others, significant expenditures in support of Callaway Golf Ball
Company's efforts to develop and market new golf ball products.
Callaway Golf has the ability to create and modify golf club designs by
using computer aided design software ("CAD"), computer aided manufacturing
software ("CAM") and computer numerical control ("CNC") milling equipment. CAD
software enables designers to develop computer models of new clubhead and shaft
designs. CAM software is then used by engineers to translate the digital output
from CAD computer models so that physical prototypes can be produced. Through
the use of this technology, Callaway Golf has been able to greatly accelerate
the design, development and testing of new golf clubs. In addition, Callaway
Golf Ball Company's sophisticated CAD/CAM design, tooling, ball prototyping and
indoor testing equipment, together with the Company's predictive computer
modeling capability, allows it to develop and test prototype golf balls in a
very short cycle time.
The Company believes that the introduction of new, innovative golf clubs
and golf balls is important to its future success. The Company faces certain
risks associated with such a strategy. For example, new models and basic design
changes in golf equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete within a relatively
short period of time as new products are introduced into the marketplace.
Further, any new products that retail at a lower price than prior products may
negatively impact the Company's revenues unless unit sales increase. New golf
club and golf ball products generally seek to satisfy the standards established
by the United States Golf Association ("USGA") and the Royal and Ancient Golf
Club of St. Andrews ("R&A") because these standards are generally followed by
golfers within their respective jurisdictions. While all of the Company's
current golf clubs and golf balls have been found to conform to the Rules of
Golf as applied in the jurisdictions where they are sold, there is no assurance
that new designs will receive USGA and/or R&A approval, or that existing USGA
and/or R&A standards will not be altered in ways that adversely affect the sales
of the Company's products. For example, on November 2, 1998, the USGA announced
the adoption of a test protocol to measure the so-called "spring-like effect" in
certain golf clubheads. The USGA has advised the Company that none of the
Company's current clubs sold in the U.S. are barred by this test. The R&A is
considering the adoption of a similar or related test but has not yet done so.
Both the USGA and the R&A are reviewing the current regulations of golf, and one
or both may change those regulations in the future. Future actions by the USGA
or the R&A may adversely impact acceptance of the Company's new products and
therefore could have a material adverse effect on the Company's results of
operations and cash flows.
The Company's new products have tended to incorporate significant
innovations in design and manufacture, which have often resulted in higher
prices for the Company's products relative to other products in the marketplace.
6
The Company's golf balls are premium golf balls and there are many lower priced
non-premium golf balls sold by others. There can be no assurance that a
significant percentage of the public will always be willing to pay such premium
prices for golf equipment or that the Company will be able to continue to
design and manufacture premium products that achieve market acceptance in the
future.
The rapid introduction of new golf club or golf ball products by the
Company could result in close-outs of existing inventories at both the wholesale
and retail levels. Such close-outs can result in reduced margins on the sale of
older products, as well as reduced sales of new products, given the availability
of older products at lower prices. The Company experienced some of these effects
in 1999 with respect to golf clubs and could experience similar effects in
future years as the Company from time to time introduces new products or
misjudges demand.
The Company plans its manufacturing capacity based upon the forecasted
demand for its products. Actual demand for such products may exceed or be less
than forecasted demand. The Company's unique product designs often require
sophisticated manufacturing techniques, which can limit the Company's ability to
quickly expand its manufacturing capacity to meet the full demand for its
products. If the Company is unable to produce sufficient quantities of new
products in time to fulfill actual demand, especially during the Company's
traditionally busy second and third quarters, it could limit the Company's sales
and adversely affect its financial performance. On the other hand, the Company
commits to components and other manufacturing inputs for varying periods of
time, which can limit the Company's ability to quickly react if actual demand is
less than forecast. As in 1998, this could result in excess inventories and
related obsolescence charges that could adversely affect the Company's financial
performance.
Sales and Marketing
Golf Club Sales in the United States
Approximately 58%, 62%, and 65% of the Company's net sales were derived
from sales for distribution within the United States in 1999, 1998 and 1997,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1999, 1998, or 1997. The Company
distributes its products in Hawaii through an exclusive distributor. The Company
previously reported that it believed that the dollar volume of the premium golf
club market had been declining in certain major markets, including the United
States. Although the Company believes that market conditions may have
stabilized, there is no assurance that the overall dollar volume of the premium
golf club market in the United States will grow significantly, or that it will
not decline, in the near future. During 1999, the Company's U. S. revenues
decreased 5% compared to 1998. The Company believes that this decrease in United
States revenue was due in part to softness in the United States market, lower
revenue per club from sales of golf equipment at low or close-out prices, and
declines in iron and putter sales due to the maturity of those product lines.
The Company, through its subsidiary Callaway Golf Sales Company, currently
employs full-time regional field representatives, in-house telephone
salespersons and customer service representatives in connection with golf club
and accessory sales. Each geographic region is covered by both a field
representative and a telephone salesperson who work together to initiate and
maintain relationships with customers through frequent telephone calls and in-
person visits. The Company believes that this tandem approach of utilizing
field representatives and telephone salespersons provides the Company a
competitive advantage over other golf club manufacturers that distribute their
golf clubs solely through independent sales representatives rather than
employees. Notwithstanding the foregoing, Callaway Golf recognizes that other
companies have marketing programs which may be equally or more effective than
its own strategy.
Golf Club Sales Outside of the United States
Approximately 42%, 38% and 35% of the Company's net sales were derived from
sales for distribution outside of the United States in 1999, 1998, and 1997,
respectively. In 1997, the majority of the Company's international sales were
made through distributors specializing in the sale and promotion of golf clubs
in specific countries or regions around the world. In 1999 and 1998, the
majority of the Company's international sales were made through its foreign
subsidiaries. During 1999, the Company's international revenues increased 16%
compared to 1998. The Company believes that this increase in international
revenue is largely attributable to a significant increase in revenue from sales
in Korea as a result of the economic recovery of the Korean market and the
introduction of higher margin products in Korea in 1999. The Company does not
expect that revenue in Korea will continue to increase at a rate comparable to
1999. The Company further believes that some portion of sales to international
customers recorded
7
in 1999 as direct international sales may have formerly been made to the same
international customers indirectly through the United States distribution
channel. See below "Gray Market."
The Company's management believes that controlling the distribution of its
products in certain major markets in the world has been and will be an element
in the future growth and success of the Company. The Company has been actively
pursuing a reorganization of its international operations, including the
acquisition of distribution rights in certain key countries in Europe, Asia and
North America. These efforts have resulted and will continue to result in
additional investments in inventory, accounts receivable, corporate
infrastructure and facilities. The integration of foreign distribution into the
Company's international sales operations will continue to require the dedication
of management and other Company resources.
As a result of these acquisitions, the Company sells its products in Great
Britain, Belgium, Finland, Denmark, Sweden, Norway, Ireland, France, Germany,
Austria, the Netherlands, and Switzerland through its subsidiary Callaway Golf
Europe Ltd. The Company sells its products in Korea through its subsidiary
Callaway Golf Korea Ltd. The Company sells its products in Canada through its
subsidiary, Callaway Golf Canada Ltd.
In addition to sales through its subsidiaries, the Company also currently
has distribution arrangements covering sales of the Company's products in over
40 foreign countries, including Singapore, Spain, Italy, Hong Kong, Australia,
Argentina and South Africa. Prices of golf clubs for sales outside of the United
States receive an export pricing discount to compensate international
distributors for selling, advertising and distribution costs. A change in the
Company's relationship with significant distributors could negatively impact the
volume of the Company's international sales.
The Company appointed Sumitomo Rubber Industries, Ltd. ("Sumitomo") as the
sole distributor of Callaway Golf(R) clubs in Japan, through a distribution
agreement that ended December 31, 1999. In 1999, 1998 and 1997, sales to
Sumitomo accounted for 7%, 8% and 10%, respectively, of the Company's net sales.
In the fourth quarter of 1999, the Company successfully completed negotiations
with Sumitomo to provide a smooth transition of the Callaway Golf business to
the Company. As a result of the transition agreement, the Company recorded a net
charge of $8.6 million in the fourth quarter of 1999 for buying certain current
inventory, payments for non-current inventory and other transition expenses,
including foreign currency transaction losses.
Effective January 1, 2000, the Company began distributing Callaway Golf(R)
brand products in Japan through its wholly-owned subsidiary, Callaway Golf K.
K., which also distributes Odyssey(R) products and will also distribute Callaway
Golf(TM) balls. In addition to the fourth quarter 1999 charges noted above,
there will be significant costs and capital expenditures invested in Callaway
Golf K. K. before there will be sales sufficient to support such costs.
Furthermore, there are significant risks associated with the Company's intention
to effectuate distribution of Callaway Golf(R) products in Japan through
Callaway Golf K. K. rather than through Sumitomo. These risks include increased
delinquent and uncollectible accounts now that the Company will be collecting
its receivables from many retailers as opposed to only one distributor.
Furthermore, the Sumitomo distribution agreement required that Sumitomo purchase
specific minimum quantities from the Company. As a direct distributor, the
Company will not have the benefit of these guaranteed minimum purchases going
forward. There also is no assurance that the Company will be able to transcend
the cultural and other barriers to successful distribution in Japan or that its
sales in Japan will be comparable to or exceed its prior sales to Sumitomo. It
is possible that these circumstances could have a material adverse effect on the
Company's operations and financial performance. There also will be a delay in
the recording of revenues for sales in Japan as compared to previous years
because revenue will now be recorded upon sale to the retailers and not upon
sale to a distributor.
The Company's plan to integrate foreign distribution increases the
Company's exposure to fluctuations in exchange rates for various foreign
currencies which could result in losses and, in turn, could adversely impact the
Company's results of operations. There can be no assurance that the Company will
be able to mitigate this exposure in the future through its management of
foreign currency transactions. The integration of foreign distribution also
could result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the acquisition of some or all of the
Company's foreign distribution will be successful, and it is possible that an
attempt to do so will adversely affect the Company's business.
Many of the countries in which the Company sells its products are Member
States of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999,
Member States of the EMU have the option of trading in either their local
currencies or the euro, the official currency of EMU participating Member
States. Parties are free to choose the unit they prefer in contractual
relationships until 2002 when their local currencies will be phased out. The
current version of the Company's enterprise-wide business system does not
support transactions denominated in euro. During 2000, the Company intends to
upgrade its business system. The upgraded version of this business system should
8
support transactions denominated in euro. The Company intends to enable the euro
functionality of its upgraded system no later than its third quarter in 2001.
Until such time as the upgrade has occurred and the euro functionality has been
enabled, transactions denominated in euro will be processed manually. To date,
the Company has not experienced, and does not anticipate in the near future, a
large demand from its customers to transact in euro. Additionally, the Company
does not believe that it will incur material costs specifically associated with
manually processing data or preparing its business systems to operate in either
the transitional period or beyond. However, there can be no assurance that the
conversion of EMU Member States to euro will not have a material adverse effect
on the Company and its operations.
Golf Ball Sales
In 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company had previously licensed the manufacture and
distribution of a golf ball in Japan and Korea. The Company also had distributed
a golf ball under the trademark "Bobby Jones(R)." These previous golf ball
ventures were introduced primarily as promotional efforts and were not
commercially successful.
In February 2000, Callaway Golf Ball Company released its new Rule 35(TM)
Golf Balls. These golf balls are the product of more than three years of
research and development and are manufactured in a new facility built for that
purpose. To date, the Company's investment in its golf ball business has
exceeded $170 million. The development of the golf ball business, by plan, has
had a significant negative impact on the Company's cash flows, financial
position and results of operations and will continue to affect the Company's
performance in 2000. The success of the Company's new golf ball business could
be adversely affected by various risks, including, among others, delays or
difficulties in manufacturing or distribution and unanticipated costs. Although
initial demand for the Company's golf balls is promising, there is no assurance
that such demand will result in a proportionate amount of actual sales or that
consumers will enjoy the balls sufficiently to sustain future sales.
Furthermore, although the Company expects production of the golf balls to
increase as 2000 progresses, there is no assurance that the Company will be able
to manufacture enough balls to meet demand or be able to achieve the operational
or sales efficiencies necessary to make its golf ball business profitable.
Consequently, there can be no assurance as to whether the golf ball will be
commercially successful or that a return on the Company's investment will
ultimately be realized.
Callaway Golf Ball Company sells its golf balls in the United States
through its own dedicated sales team. Its sales representatives are employees
and consist of retail sales representatives and corporate sales representatives.
The retail sales representatives service both on-course and off-course customers
in their assigned geographic territories and are further supported by in-house
telephone sales representatives. Both field and in-house telephone corporate
sales representatives call on corporate customers who want their corporate logo
placed on the Company's golf balls. Unlike many of its competitors, Callaway
Golf Ball Company does not use third parties to provide the corporate logo golf
balls. Callaway Golf Ball Company imprints the logos on its golf balls in the
same facility in which it manufactures the golf balls, thereby retaining control
over the quality of the process and final product. Callaway Golf Ball Company
also pays an agency fee to certain on- and off-course professionals and
retailers with whom it has a relationship for corporate sales that originate
through such professionals and retailers. Its international sales will be
effected through the Company's international subsidiaries and distributors.
Gross Margin
The Company's gross margin as a percentage of net sales increased to 47% in
1999 from 42% in 1998. This increase primarily resulted from lower obsolescence
charges in 1999 (vs. a $30 million excess inventory charge recorded in the
fourth quarter of 1998), higher metal wood sales (which carry higher margins) as
a percentage of total net sales, as compared to 1998, and from reductions in
manufacturing labor and overhead costs realized through the Company's 1998
restructuring, along with reductions in certain component costs. Gross margin as
a percentage of net sales would have improved to 49% but for close-out sales of
Great Big Bertha(R) Tungsten Titanium(TM) Irons, Great Big Bertha(R) and Biggest
Big Bertha(R) Titanium Metal Woods, and Big Bertha(R) War Bird(R) Metal Woods,
which had much lower margins. However, consumer acceptance of current and new
product introductions, the sale and disposal of non-current products at reduced
sales prices and continuing pricing pressure from competitive market conditions
may have an adverse effect on the Company's future sales and gross margin.
Furthermore, the Company expects that in 2000 the Company's sales of irons as a
percentage of total net sales will increase. This would negatively impact the
Company's gross margin as a percentage of net sales because irons generally sell
at lower margins than woods.
The Company's margins also could be affected by its golf ball business.
During 2000, the Company expects that its margins in the golf ball business will
be less than the levels it expects to achieve when the Company can attain a
level of operational and sales efficiency that allows it to benefit from certain
economies of scale. There is no
9
assurance, however, that the Company will achieve the economies of scale
necessary to maintain or improve its current overall sales margins.
Method of Distribution
The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of golf club and golf ball products to its U.S. customers. The Company
is continually reviewing alternative methods of ground shipping to supplement
its use and reduce its reliance on UPS. To date, a limited number of alternative
vendors have been identified and are being used by the Company. Nevertheless,
any interruption in UPS services could have a material adverse effect on the
Company's sales and results of operations.
Gray Market
Some quantities of the Company's products find their way to unapproved
outlets or distribution channels. This "gray market" for the Company's products
can undermine authorized retailers and foreign wholesale distributors who
promote and support the Company's products, and can injure the Company's image
in the minds of its customers and consumers. On the other hand, stopping such
commerce could result in a potential decrease in sales to those customers who
are selling Callaway Golf(R) products to unauthorized distributors and/or an
increase in sales returns over historical levels. For example, the Company
experienced a decline in sales in the United States in 1998, and believes the
decline was due, in part, to a decline in "gray market" shipments to Asia and
Europe. While the Company has taken some lawful steps to limit commerce in its
products in the "gray market" in both the United States and abroad, it has not
stopped such commerce.
Credit Risk
The Company primarily sells its products to golf equipment retailers, both
in the United States and abroad, and to foreign distributors. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from these customers. Historically, the
Company's bad debt expense has been low. However, the recent downturn in the
retail golf equipment market, primarily in the United States, has resulted in
delinquent or uncollectible accounts for some of the Company's significant
customers. As a result, during 1999 the Company wrote off approximately $5.3
million of past due trade accounts receivable against the Company's reserve for
uncollectible accounts receivable. Management does not foresee any significant
improvement in the U.S. retail golf equipment market during 2000. In addition,
the Company's transition in Japan from selling to one distributor to selling
directly to many retailers could increase the Company's delinquent or
uncollectible accounts. There can be no assurance that failure of the Company's
customers to meet their obligations to the Company will not adversely impact the
Company's results of operations or cash flows.
Advertising and Promotion
Within the United States, the Company has focused its advertising efforts
mainly on a combination of television commercials and printed advertisements in
national magazines, such as Golf Digest, Golf Magazine, Golfweek, Golf World and
Sports Illustrated's Golf Plus, and in trade publications, such as Golf Shop
Operations. Advertising of the Company's golf clubs outside of the United States
is typically handled by the Company's wholly-owned subsidiaries as well as
distributors and resellers of the products in a particular country.
The Company establishes relationships with professional golfers in order to
evaluate and promote Callaway Golf(R) and Odyssey(R) branded products. The
Company has entered into endorsement arrangements with members of the various
professional tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour
and the PGA European Tour. While most professional golfers fulfill their
contractual obligations, some have been known to stop using a sponsor's products
despite contractual commitments. If certain of the Company's professional
endorsers were to stop using the Company's products contrary to their
endorsement agreements, the Company's business could be adversely affected in a
material way by the negative publicity.
Many professional golfers throughout the world use the Company's golf clubs
even though they are not contractually bound to do so and do not grant any
endorsement to the Company. In addition, the Company has created cash pools
("Pools") that reward such usage. However, in 1999, as compared to 1998, the
Company significantly reduced these Pools for both Callaway Golf(R) and
Odyssey(R) brand products for the PGA and the Senior PGA Tours, and has
significantly reduced the Pools for Odyssey(R) brand products and eliminated the
Pools for Callaway Golf(R) brand products for the LPGA and buy.com (formerly
Nike) tours. The Company expects that the Pools for 2000 will be comparable to
1999. In addition, many other companies are aggressively seeking the patronage
of these professionals, and are offering many inducements, including specially
designed products and significant cash rewards.
10
As a result, in 1999, usage of the Company's drivers on the PGA, Senior PGA,
LPGA and buy.com tours was substantially reduced compared to 1998. This trend
may continue in 2000.
For the last several years, the Company has experienced an exceptional level
of driver penetration on the world's five major professional tours, and the
Company has heavily advertised that fact. While it is not clear to what extent
professional usage contributes to retail sales, it is possible that the recent
decline in the level of professional usage of the Company's products could have
a material adverse effect on the Company's business.
Many golf ball manufacturers, including the leading U.S. manufacturer of
premium golf balls, have focused a great deal of their marketing efforts on
promoting the fact that tour professionals use their balls. Some of these golf
ball competitors spend large amounts of money to secure professional
endorsements, and the market leader has obtained a very high degree of tour
penetration. While several of the Company's staff professionals have decided to
use the Company's golf balls in play, there are others who are already under
contract with other golf ball manufacturers or, for other reasons, may not
choose to play the Company's products. In addition, several professionals who
are not on the Company's staff have expressed an interest in playing the
Company's ball, but it is too early to predict if a significant number will
actually do so. The Company does not plan to match the endorsement spending
levels of the leading manufacturer in 2000, and will instead rely more heavily
upon the performance of the ball and other factors to attract professionals to
the product. In the future the Company may or may not increase its tour
spending in support of the golf ball. It is not clear to what extent use by
professionals is important to the commercial success of the Company's golf ball,
but it is possible that the results of the Company's golf ball business could be
significantly affected by its success or lack of success in securing acceptance
on the professional tours.
To support the promotion of its products at the retail level, the Company
offers various promotional programs to its customers. Golf clubs may be
purchased at a discount by golf shop professionals, for personal demonstration,
test, loan and rental use.
The Company's advertising, promotional and endorsement related expenses,
including compensation to professional golfers, were approximately $55.4
million, $79.1 million and $62.4 million in 1999, 1998 and 1997, respectively.
Manufacturing and Sources and Availability of Materials
The manufacturing of the Company's golf clubs and golf balls involves a
number of specialized processes required by the unique design of the products.
The Company's metal woods and irons are produced by the Company's
manufacturing personnel at its Carlsbad, California facilities using clubheads,
shafts and grips supplied by independent vendors. The Company works with a few
select casting houses to produce its clubheads. The clubheads used in the
production of Great Big Bertha(R) Hawk Eye(R) Titanium Drivers and Fairway Woods
are manufactured to Callaway Golf's specifications by Cast Alloys, Inc.
("Alloys"), Coastcast Corporation ("Coastcast"), and Fu Sheng. Coastcast and
Alloys cast Big Bertha(R) Steelhead Plus(TM) Stainless Steel Drivers and Fairway
Woods clubheads. Big Bertha(R) Steelhead(TM) X-14(TM) Stainless Steel Irons are
provided by Hitchiner Manufacturing Co. and Coastcast, and Big Bertha(R) X-12(R)
reduced offset iron clubheads are provided by Coastcast. Hawkeye(R) Tungsten
Injected(TM) Titanium Irons are provided by Coastcast. The Company's principal
supplier of clubheads for the Company's putters are provided by Hitchiner
Manufacturing Co. The Company works closely with its casting houses, which
enables the Company to monitor the quality and reliability of clubhead
production. All of these casting houses are currently manufacturing, or are
entitled to manufacture, clubheads for competitors of the Company. The Company
also works closely with Aldila, True Temper, HST, Graphite Design, Inc., FM
Precision, Suntech-Sunwoo Co, Ltd., its principal suppliers of shafts, to
develop specialized shafts suited to the S2H2(R) design and the other unique
features of the Company's products. The Company's proprietary grip designs are
provided by Golf Pride Lamkin and Winn Grips.
The Company is dependent on a limited number of suppliers for its club
heads and shafts. In addition, some of the Company's products require
specifically developed manufacturing techniques and processes which make it
difficult to identify and utilize alternative suppliers quickly. The Company
believes that suitable club heads and shafts could be obtained from other
manufacturers in the event its regular suppliers are unable to provide
components. However, any significant production delay or disruption caused by
the inability of current suppliers to deliver, or the transition to other
suppliers, could have a material adverse impact on the Company's results of
operations.
The Company's golf balls are also produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using core and cover materials
supplied by independent vendors. The Company is also dependent on a limited
number of suppliers for the materials it uses to make its golf balls. Many of
the materials, including the golf ball cover material, are customized for the
Company. The Company has developed supply relationships with
11
several resin and chemical producers worldwide. It works closely with such
suppliers to maintain tight tolerances in the manufacturing processes and also
to develop next generation formulations for golf ball research and development.
Any delay or interruption in the supply chain could have a material adverse
impact upon the Company's golf ball business. If the Company did experience any
such delays or interruptions, there is no assurance that the Company would be
able to find adequate alternative suppliers at a reasonable cost or without
significant disruption to its business.
The Company's size has made it a large consumer of certain materials,
including titanium alloys, carbon fiber and custom blend urethanes. Callaway
Golf does not make these materials itself, and must rely on its ability to
obtain adequate supplies in the world marketplace in competition with other
users of such materials. While the Company has been successful in obtaining its
requirements for such materials thus far, there can be no assurance that it
always will be able to do so. An interruption in the supply of such materials or
a significant change in costs could have a material adverse effect on the
Company.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
Handling of Materials
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. As a standard procedure, a comprehensive audit of the treatment,
storage, and disposal facility with which the Company contracts for the disposal
of hazardous waste is performed annually by the Company. To date, the Company
has not experienced any material environmental compliance problems, although
there can be no assurance that such problems will not arise in the future.
Product Warranties
The Company supports all of its golf clubs with a limited two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. In addition, the
Company's Biggest Big Bertha(R) Drivers, because of their large club head size
and extra long, lightweight graphite shafts, have experienced shaft breakage at
a rate higher than generally experienced with the Company's other metal woods,
even though these shafts were among the most expensive to manufacture in the
industry. This product was discontinued in 1999. While any breakage or warranty
problems are deemed significant to the Company, the incidence of clubs returned
as a result of cracked clubheads, broken graphite shafts, loose medallions and
other product problems to date has not been material in relation to the volume
of Callaway Golf(R) clubs that have been sold.
The Company monitors the level and nature of any golf club breakage and,
where appropriate, seeks to incorporate design and production changes to assure
its customers of the highest quality available in the market. Significant
increases in the incidence of breakage or other product problems may adversely
affect the Company's sales and image with golfers. While the Company believes
that it has sufficient reserves for warranty claims, there can be no assurance
that these reserves will be sufficient if the Company were to experience an
unusually high incidence of breakage or other product problems.
Intellectual Property
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents, trademark registrations and copyrights, the maintenance of trade
secrets, the development of trade dress, and, when necessary and appropriate,
litigation against those who are, in the Company's opinion, unfairly competing.
In the United States, the Company has applied for or been granted patents for
certain features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway Golf(R), Big Bertha(R), Great Big Bertha(R), Hawk
Eye(R), S2H2(R), Odyssey(R), Stronomic(R) and several other product names. There
is no assurance that during the life of a patent or a trademark, prior to a
court of competent jurisdiction validating them, any of these patents or
trademarks are enforceable, although the Company believes them to be
enforceable.
12
The golf club industry, in general, has been characterized by widespread
imitation of popular club designs. The Company has an active program of
enforcing its proprietary rights against companies and individuals who market or
manufacture counterfeits and "knock-off" products, and aggressively asserts its
rights against infringers of its copyrights, patents, trademarks, and trade
dress. However, there is no assurance that these efforts will reduce the level
of acceptance obtained by these infringers. Additionally, there can be no
assurance that other golf club manufacturers will not be able to produce
successful golf clubs which imitate the Company's designs without infringing any
of the Company's copyrights, patents, trademarks, or trade dress.
An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark, copyright or other protection of
their proprietary rights and designs for golf clubs. From time to time others
have or may contact the Company to claim that they have proprietary rights that
have been infringed by the Company and/or its golf club products. The Company
evaluates any such claims and, where appropriate, has obtained or sought to
obtain licenses or other business arrangements. To date, there have been no
interruptions in the Company's business as a result of any claims of
infringement. No assurance can be given, however, that the Company will not be
adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
Various patents have been issued to the Company's competitors in the golf
ball industry. As Callaway Golf Ball Company developed its new golf ball
product, it attempted to avoid infringing valid patents or other intellectual
property rights. Despite these attempts, it cannot be guaranteed that a
competitor will not assert and/or a court will not find that the Company's new
golf ball products infringe any patent or other rights of competitors. If the
Company's new golf ball product is found to infringe on protected technology,
there is no assurance that the Company would be able to obtain a license to use
such technology, and the Company could incur substantial costs to redesign its
golf ball products and/or defend legal actions.
The Company has procedures to maintain the secrecy of its confidential
business information. These procedures include criteria for dissemination of
information and written confidentiality agreements with employees and vendors.
Suppliers, when engaged in joint research projects, are required to enter into
additional confidentiality agreements. While these efforts are taken seriously,
there can be no assurance that these measures will prove adequate in all
instances to protect the Company's confidential information.
Licensing
Through a licensing arrangement with Jonesheirs, Inc., Callaway Golf
obtained the exclusive, worldwide rights to the use of the Bobby Jones(R) name
for golf clubs and golf-related accessories through 2010. The Company receives a
royalty from the Hickey-Freeman Company on sales of Bobby Jones(R) Sportswear
and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel in the
U.S. at its own expense under the "Callaway Golf Apparel by Nordstrom" label.
The licensing agreement runs through 2004 with automatic one-year extensions
unless terminated by either party. The line includes men's and women's golf
apparel, golf footwear and certain other products and is sold at Nordstrom
stores throughout the United States.
In 1997, Callaway Golf and Bausch & Lomb Incorporated signed a multi-year
agreement to jointly develop and globally market an exclusive line of premium
sunglasses specifically for golf enthusiasts. The sunglasses and sunglass
cases, co-branded with the Ray-Ban(R), Callaway Golf(R) and Callaway(R) marks,
were introduced in 1999 and are available through golf pro shops and other
retailers of premium golf equipment, better sporting goods and better department
stores, sunglass specialty shops and optical channels. Later in 1999, the
Luxottica Group purchased the Bausch & Lomb sunglass business. The Company is
currently discussing with Luxottica what effect the acquisition will have on the
relationship.
Seasonality
In the golf club and golf ball industries, sales to retailers are generally
seasonal due to lower demand in the retail market in the cold weather months
covered by the Company's fourth and first quarters. The Company's golf club
business has generally followed this seasonal trend and the Company expects this
to continue for both its golf club and golf ball businesses. Unusual or severe
weather conditions such as the "El Nino" weather patterns experienced during the
winter of 1997-1998 may compound or otherwise distort these seasonal effects.
13
Competition
The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names, as well as new companies with popular products. With
respect to metal woods, the Company's major domestic competitors are Taylor
Made, Titleist, Cobra and Ping. In 1998, Orlimar and Adams emerged as new
competitors. With respect to irons, the Company's major domestic competitors
are Titleist, Cobra, Taylor Made and Ping. For putters, the Company's major
domestic competitors are Ping and Titleist. New product introductions and/or
price reductions by competitors continue to generate increased market
competition. However, the Company believes that it has gained unit and dollar
market share for woods in the United States during 1999 as compared to 1998.
While the Company believes that its products and its marketing efforts continue
to be competitive, there can be no assurance that successful marketing
activities by competitors will not negatively impact the Company's future sales.
A golf club manufacturer's ability to compete is in part dependent upon its
ability to satisfy the various subjective requirements of golfers, including the
golf club's look and feel, and the level of acceptance that the golf club has
among professional and other golfers. The subjective preferences of golf club
purchasers may be subject to rapid and unanticipated changes. There can be no
assurance as to how long the Company's golf clubs will maintain market
acceptance.
The premium golf ball business is also highly competitive with a number of
well-established and well-financed competitors, including Titleist, Spalding,
Sumitomo Rubber Industries, Bridgestone and others. These competitors have
established market share in the golf ball business, with one of its competitors
having an estimated market share in excess of 50% of the premium golf ball
business. The Company will need to penetrate this market share for its golf
ball business to be successful. There can be no assurance that the Company's
golf balls will obtain the market acceptance necessary to penetrate this
established market.
Employees
As of December 31, 1999, the Company and its subsidiaries had 2,526 full-
time employees, including 399 employed in sales and marketing, 191 employed in
research and development and product engineering and 1,002 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
Item 2. Properties.
The Company and its subsidiaries conduct operations in both owned and
leased properties, located primarily near the Company's headquarters in
Carlsbad, California. The eleven buildings utilized in the Company's Carlsbad
operations include corporate offices, manufacturing, research and development,
warehousing and distribution facilities, and comprise approximately 778,000
square feet of space. Eight of these properties, representing approximately
605,000 square feet of space are owned by the Company; an additional three
properties, representing approximately 173,000 square feet of space, are leased.
In addition, the Company and its subsidiaries conduct certain international
operations outside of the United States, located in the United Kingdom, Canada,
Japan and Korea, in leased facilities comprising approximately 195,000 square
feet. The Company believes that its facilities currently are adequate to meet
its requirements.
Item 3. Legal Proceedings.
The Company, incident to its business activities, is often the plaintiff in
legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated or may initiate actions against
alleged infringers under the intellectual property laws of various countries,
including, for example, the United States Lanham Act, the U.S. Patent Act, and
other pertinent laws. Defendants in these actions may, among other things,
contest the validity and/or the enforceability of some of the Company's patents
and/or trademarks. Others may assert counterclaims against the Company. Based
upon the Company's experience, the Company believes that the outcome of these
matters individually and in the aggregate will not have a material adverse
effect upon the financial position or results of operations of the Company. It
is possible, however, that in the future one or more defenses or claims asserted
by defendants in one or more of those actions may
14
succeed, resulting in the loss of all or part of the rights under one or more
patents, loss of a trademark, a monetary award against the Company, or some
other loss to the Company. One or more of these results could adversely affect
the Company's overall ability to protect its product designs and ultimately
limit its future success in the marketplace.
In addition, the Company from time to time receives information claiming
that products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has not
experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the future one
or more claims of potential infringement could lead to litigation, the need to
obtain additional licenses, the need to alter a product to avoid infringement,
or some other action or loss by the Company.
The Company and its subsidiaries, incident to their business activities,
are parties to a number of legal proceedings, lawsuits and other claims. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, management is unable to ascertain the ultimate
aggregate amount of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these matters. However,
management believes that the final resolution of these matters, individually and
in the aggregate, will not have a material adverse effect upon the Company's
annual consolidated financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Executive Officers of the Registrant
Biographical information concerning certain of the Company's officers is
set forth below.
Name Age Position(s) Held
---- --- ----------------
Ely Callaway.................. 80 Founder, Chairman and Chief Executive Officer
Charles J. Yash............... 51 President and Acting Principal Financial Officer
Ronald A. Drapeau............. 53 Senior Executive Vice President, Manufacturing
Richard C. Helmstetter........ 58 Senior Executive Vice President, Chief of New Golf Club Products
Steven C. McCracken........... 49 Executive Vice President, Licensing, Chief Legal Officer and Secretary
Michael W. McCormick.......... 37 Executive Vice President, Global Sales
Ely Callaway, Founder, has served his current term as Chief Executive
Officer since October 1998, and also has served as Chairman of the Board of the
Company since the Company's formation in 1982. Mr. Callaway also currently
serves on the Finance Committee and as Chairman of the Stock Option Committee
(Non-Employee Plans). He served as President of the Company from October 1998
until August 1999, as Chief Executive Officer from 1982 to May 1996, and Chief
of Advertising, Press and Public Relations from April 1997 to October 1998.
From 1974 to 1981, Mr. Callaway founded and operated Callaway Vineyard and
Winery in Temecula, California, until it was sold. From 1946 to 1973, Mr.
Callaway worked in the textile industry, where he served as a Divisional
President of several major divisions of Burlington Industries, Inc., and in 1968
was elected Corporate President and Director of Burlington, which at the time
was the world's largest textile company. Prior to 1945, Mr. Callaway served a
five-year tour of duty in the U.S. Army Quartermaster Corps. Mr. Callaway is a
1940 graduate of Emory University.
Charles J. Yash has served as a Director of the Company since July 1996 and
President of the Company since August 1999. Mr. Yash was Senior Executive Vice
President of the Company from February 1999 to August 1999 and Executive Vice
President from February 1998 to February 1999. He has also served as President
and Chief Executive Officer of Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, since June 1996. From 1992 to June 1996, Mr. Yash
was President and Chief Executive Officer and a Director of Taylor Made Golf
Company. From 1979 to 1992, Mr. Yash was employed in various marketing
positions with the golf products division of Spalding Sports Worldwide,
including Corporate Vice President and General Manager-Golf Products, from 1988
to 1992. From 1970 to 1975, Mr. Yash served in the United States Navy in
various positions. Mr. Yash completed the Advanced Executive Program at the
University of Massachusetts in 1982, received his M.B.A. in 1977 from Harvard
Business School and graduated with a Bachelor of Science degree from the U.S.
Naval Academy in 1970.
15
Ronald A. Drapeau has served as Senior Executive Vice President,
Manufacturing, since February 1999 and as President and Chief Executive Officer
of Odyssey Golf, Inc., a former wholly-owned subsidiary of the Company, from
August 1997 until its dissolution in December 1999. Mr. Drapeau served as
Executive Vice President of the Company from August 1997 to February 1999, and
served as a consultant to the Company from November 1996 to August 1997. From
April 1993 to September 1996, Mr. Drapeau served as Chief Executive Officer of
Lynx Golf, Inc., a subsidiary of Zurn Industries, Inc., and served as Senior
Vice President and Chief Financial Officer of Zurn Industries, Inc. from 1992 to
1993. He is a 1969 graduate of Bentley College.
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Golf Club Products since January 1998 and as Senior
Executive Vice President, Chief of New Products from April 1993 to January 1998.
Mr. Helmstetter served as President from 1990 to 1993 and as Executive Vice
President from 1986 to 1990. From 1967 to 1986, Mr. Helmstetter served as
President of Adam Ltd., a pool cue manufacturing and merchandising company which
he founded and operated in Japan. During 1982 and 1983, Mr. Helmstetter also
consulted extensively for several Japanese, European and American companies,
including Bridgestone Corporation's strategic planning group. Mr. Helmstetter is
a 1966 graduate of the University of Wisconsin.
Steven C. McCracken has served as Executive Vice President, Licensing and
Chief Legal Officer since April 1997 and as Secretary since April 1994. He has
served as an Executive Vice President since April 1996 and served as General
Counsel from April 1994 to April 1997. He served as Vice President from April
1994 to April 1996. Prior to joining the Company, Mr. McCracken was a partner
at Gibson, Dunn & Crutcher for 11 years, and had been in the private practice of
law for over 18 years. During part of that period, he provided legal services
to the Company. Mr. McCracken received a B.A., magna cum laude, from the
University of California at Irvine in 1972 and a J.D. from the University of
Virginia in 1975.
Michael W. McCormick has served as Executive Vice President, Global Sales
since January 2000. Prior to joining the Company, Mr. McCormick was with Nike,
Inc. since 1992, serving as Eastern Regional Sales Manager, Director of Golf
Sales, Southern Regional Sales Manager, and Director of National Sales. He was
responsible for more than $2 billion of Nike footwear, apparel and equipment
revenues. Prior to Nike, Mr. McCormick was Vice President, Operations for Las
Vegas Golf and Tennis from 1989 to 1992.
Information with respect to the Company's employment agreements with
Messrs. Callaway, Yash and Helmstetter is contained on pages 15 and 16 of the
Company's definitive Proxy Statement under the caption "Compensation of
Executive Officers - Employment Agreements and Termination of Employment
Agreements" as filed with the Securities and Exchange Commission on March 29,
2000 pursuant to Regulation 14A, which information is incorporated herein by
reference. In addition, the Company currently has employment agreements with
Messrs. Drapeau, McCracken and McCormick for terms expiring on December 31,
2000, December 31, 2000 and December 31, 2002 respectively.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information in response to Item 5 is contained on page 48 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 6. Selected Financial Data.
Information in response to Item 6 is contained on page 16 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Information in response to Item 7 is contained on pages 17 through 27 of
the Company's 1999 Annual Report to Shareholders, which information is
incorporated herein by reference and is included as part of Exhibit 13.1 to this
Form 10-K.
16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information in response to Item 7A is contained on page 27 of the Company's
1999 Annual Report to Shareholders, which information is incorporated herein by
reference and is included as part of Exhibit 13.1 to this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Information in response to Item 8 is contained on pages 28 through 48 of
the Company's 1999 Annual Report to Shareholders, which information is
incorporated herein by reference and is included as part of Exhibit 13.1 to this
Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information concerning the Company's executive officers is included
under the caption "Executive Officers of the Registrant" following Part I, Item
4. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and greater than 10% shareholders to file initial
reports of ownership (on Form 3) and periodic changes in ownership (on Forms 4
and 5) of Company securities with the Securities and Exchange Commission (the
"Commission") and the New York Stock Exchange. Based solely on its review of
copies of such forms and such written representations regarding compliance with
such filing requirements as were received from its executive officers, directors
and greater than 10% shareholders, the Company believes that all such Section
16(a) reports were filed on a timely basis in 1999.
Other information required by Item 10 has been included in the Company's
definitive Proxy Statement under the caption "Board of Directors" as filed with
the Commission on March 29, 2000 pursuant to Regulation 14A, which information
is incorporated herein by reference.
Item 11. Executive Compensation.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as exhibits to this Report.
Information required by Item 11 has been included in the Company's definitive
Proxy Statement under the captions "Compensation of Executive Officers,"
"Executive Compensation Report of the Compensation and Management Succession
Committee and the Stock Option Committee (Employee Plans) of the Board of
Directors," "Performance Graph" and "Board of Directors," as filed with the
Commission on March 29, 2000 pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 has been included in the Company's
definitive Proxy Statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on March 29, 2000 pursuant
to Regulation 14A, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 has been included in the Company's
definitive Proxy Statement under the captions "Certain Transactions," and
"Compensation of Executive Officers - Compensation Committee Interlocks and
Insider Participation" as filed with the Commission on March 29, 2000 pursuant
to Regulation 14A, which information is incorporated herein by reference.
17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated financial
statements of Callaway Golf Company and its subsidiaries included in
Part II, Item 8, are incorporated by reference to pages 28 through
47 of the 1999 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1999 and 1998
Consolidated Statement of Operations for the three years ended
December 31, 1999
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial Statement Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto
3. Exhibits.
A copy of any of the following exhibits will be furnished to any
beneficial owner of the Company's Common Stock, or any person from
whom the Company solicits a proxy, upon written request and payment
of the Company's reasonable expenses in furnishing any such exhibit.
All such requests should be directed to the Company's Director of
Investor Relations at Callaway Golf Company, 2285 Rutherford Road,
Carlsbad, CA 92008.
3.1 Certificate of Incorporation, incorporated herein by this
reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K, as filed with the Securities and Exchange
Commission ("Commission") on July 1, 1999 (file no. 1-10962).
3.2 Bylaws, incorporated herein by this reference to Exhibit 3.2
to the Company's Current Report on Form 8-K, as filed with
the Commission on July 1, 1999 (file no. 1-10962).
4.1 Dividend Reinvestment and Stock Purchase Plan, incorporated
herein by this reference to the Prospectus in the Company's
Registration Statement on Form S-3, as filed with the
Commission on March 29, 1994 (file no. 33-77024).
4.2 Rights Agreement by and between the Company and Chemical
Mellon Shareholder Services as Rights Agent dated as of June
21, 1995, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1995, as filed with
the Commission on August 12, 1995 (file no. 1-10962).
4.3 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A Junior Participating
Preferred Stock, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for
18
the quarter ended June 30, 1995, as filed with the Commission
on August 12, 1995 (file no. 1-10962).
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between the
Company and Ely Callaway entered into as of January 1, 1997,
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, as filed with the Commission
on August 14, 1997 (file no. 1-10962).
10.2 First Amendment to Chairman and Founder Employment Agreement
effective December 31, 1999 between the Company and Ely
Callaway. +
10.3 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Charles J. Yash. +
10.4 Stock Option Agreement by and between the Company and Charles
J. Yash dated as of May 10, 1996, incorporated herein by this
reference to the corresponding exhibit in the Company's
Registration Statement on Form S-8, as filed with the
Commission on June 11, 1996 (file no. 333-5721).
10.5 Executive Officer Employment Agreement by and between the
Company and Richard Helmstetter entered into as of January 1,
1998, incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997, as filed with the
Commission on March 31, 1998 (file no. 1-10962).
10.6 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Ronald A. Drapeau.+
10.7 Executive Officer Employment Agreement, entered into as of
January 1, 2000, between the Company and Steven C.
McCracken. +
10.8 Executive Officer Employment Agreement, entered into as of
December 21, 1999, between the Company and Mick McCormick. +
10.9 Employment Agreement, entered into as of January 1, 2000,
between the Company and Bruce Parker. +
10.10 Resignation Agreement and General Release effective November
23, 1999 between the Company and Frederick R. Port. +
10.11 Release between Frederick R. Port and the Company. +
10.12 Agreement between the Company and Donald H. Dye dated as of
October 15, 1998, incorporated herein by this reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Commission on March 31,
1998 (file no. 1-10962).
10.13 Consulting Agreement between the Company and Donald H. Dye
dated as of October 15, 1998, incorporated herein by this
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, as filed with the Commission on
March 31, 1999 (file no. 1-10962).
10.14 Form of Tax Indemnification Agreement, incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
10.15 Amendment No. 1 to Form of Tax Indemnification Agreement,
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1996, as filed with the
Commission on November 13, 1996 (file no. 1-10962).
10.16 Executive Deferred Compensation Plan (as amended and
restated, effective January 1, 1998), incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, as filed with the Commission on May 17, 1998 (file no.
1-10962).
10.17 Amendment to Executive Deferred Compensation Plan dated as of
January 1, 1999, incorporated herein by this reference to the
Company's Quarterly report on Form 10-Q for the quarter ended
March 31, 1999, as filed with the Commission on May 17, 1999
(file no. 1-10962).
10.18 Callaway Golf Company 1998 Executive Non-Discretionary Bonus
Plan, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, as filed with
the Commission on May 15, 1997 (file no. 1-10962).
10.19 1991 Stock Incentive Plan (as amended and restated April
1994), incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, as filed with the
Commission on March 31, 1995 (file no. 1-10962).
19
10.20 Amended and Restated Stock Option Plan effective April 2, 199
1, incorporated herein by this reference to the corresponding
exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, as filed with the Commission on
April 1, 1996 (file no. 1-10962).
10.21 1996 Stock Option Plan (as amended and restated through April
23, 1998), incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1998, as filed with
the Commission on August 14, 1998 (file no. 1-10962).
10.22 Callaway Golf Company 1998 Stock Incentive Plan effective
February 18, 1998, incorporated herein by this reference to
the corresponding exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, as filed
with the Commission on August 14, 1998 (file no. 1-10962).
10.23 Callaway Golf Company Non-Employee Directors Stock Option
Plan (as amended and restated through August 17, 1999),
incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, as filed with the
Commission on November 15, 1999 (file no. 1-10962).
10.24 Indemnification Agreement by and between Callaway Golf Company
and William C. Baker dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.25 Indemnification Agreement by and between Callaway Golf Company
and Vernon E. Jordan, Jr. dated as of July 1, 1999,
incorporated herein by this reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, as filed with the Commission on August 16, 1999 (file no.
1-10962).
10.26 Indemnification Agreement by and between Callaway Golf Company
and Yotaro Kobayashi dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.27 Indemnification Agreement by and between Callaway Golf Company
and Aulana L. Peters dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
10.28 Indemnification Agreement by and between Callaway Golf Company
and Richard L. Rosenfield dated as of July 1, 1999,
incorporated herein by this reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, as filed with the Commission on August 16, 1999 (file no.
1-10962).
20
10.29 Indemnification Agreement by and between Callaway Golf Company
and William A. Schreyer dated as of July 1, 1999, incorporated
herein by this reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999, as filed with
the Commission on August 16, 1999 (file no. 1-10962).
Other Contracts
10.30 Credit Agreement dated as of December 30, 1998, among Callaway
Golf Company, the other Credit Parties signatory thereto, the
Lenders signatory thereto from time to time and General
Electric Capital Corporation , as Agent for the Lenders,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
January 28, 1999, as filed with the Commission on January 28,
1999 (file no. 1-10962).
10.31 Amended and Restated Credit Agreement dated as of February 10,
1999, among Callaway Golf Company, as Borrower, the other
credit parties signatory thereto, as Credit Parties, the
Lenders signatory thereto from time to time and General
Electric Capital Corporation , as Agent and Lender,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
February 25, 1999, as filed with the Commission on February
25, 1999 (file no. 1-10962).
10.32 Receivables Transfer Agreement dated as of February 10, 1999,
by and among Callaway Golf Sales Company and Odyssey Golf,
Inc, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form
8-K dated February 25, 1999, as filed with the Commission on
February 25, 1999 (file no. 1-10962).
10.33 Receivables Transfer Agreement dated as of February 10, 1999,
by and among Callaway Golf Company, as Parent Guarantor,
Callaway Golf Sales Company, as the CGS Originator and as
Servicer, and Golf Funding Corporation, incorporated herein by
this reference to the corresponding exhibit to the Company's
Current Report on Form 8-K dated February 25, 1999, as filed
with the Commission on February 25, 1999 (file no. 1-10962).
10.34 Receivables Purchase and Servicing Agreement dated as of
February 10, 1999, by and among Golf Funding Corporation, as
Seller, Redwood Receivables Corporation, as Purchaser,
Callaway Golf Sales Company, as Servicer, and General Electric
Capital Corporation, as Operating Agent and Collateral Agent,
incorporated herein by this reference to the corresponding
exhibit to the Company's Current Report on Form 8-K dated
February 25, 1999, as filed with the Commission on February
25, 1999 (file no. 1-10962).
10.35 Trust Agreement between Callaway Golf Company and Sanwa Bank
California, as Trustee, for the benefit of participating
employees, dated July 14, 1995, incorporated herein by this
reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, as filed with the Commission on November 14, 1995
(file no. 1-10962).
10.36 Loan Forgiveness Agreement effective as of March 8, 1999, by
and among Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
10.37 Membership Interest Purchase Agreement effective as of March
8, 1999, by and among Callaway Golf Company and Callaway
Editions, Inc., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
21
10.38 Loan Termination Agreement effective as of March 10, 1999, by
and among Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
10.39 Trademark License Agreement effective as of March 9, 1999, by
and between Callaway Golf Company and Callaway Golf Media
Ventures, LLC., incorporated herein by this reference to the
corresponding exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the
Commission on March 31, 1999 (file no. 1-10962).
13.1 Portions of the Company's 1999 Annual Report to Shareholders
(with the exception of the information incorporated by
reference specifically in this Report on Form 10-K, the 1999
Annual Report to Shareholders is not deemed to be filed as a
part of this Report on Form 10-K).
21.1 List of Subsidiaries. +
23.1 Consent of Independent Accountants. +
24.1 Powers of Attorney. +
27.1 Financial Data Schedule for the Year Ended December 31, 1999.+
+ Included in this Report
(b) Reports on Form 8-K:
None.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: March 30, 2000 By: /s/ Ely Callaway
----------------------------------
Ely Callaway
Founder, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons in the capacities and as of the date
indicated.
Signature Title Dated as of
--------- ----- -----------
Principal Executive Officer:
/s/ Ely Callaway Founder, Chairman and March 30, 2000
- ---------------------------- Chief Executive Officer and
Ely Callaway Director
Acting Principal Financial Officer:
/s/ Charles J. Yash President and Director March 30, 2000
- ----------------------------
Charles J. Yash
Principal Accounting Officer:
/s/ Kenneth E. Wolf Senior Vice President, March 30, 2000
- ---------------------------- Finance and Controller
Kenneth E. Wolf
Directors:
*
- ---------------------------- Director March 30, 2000
William C. Baker
*
- ---------------------------- Director March 30, 2000
Vernon E. Jordan, Jr.
*
- ---------------------------- Director March 30, 2000
Yotaro Kobayashi
*
- ---------------------------- Director March 30, 2000
Aulana L. Peters
*
- ---------------------------- Director March 30, 2000
Richard Rosenfield
*
- ---------------------------- Director March 30, 2000
William A. Schreyer
* By: /s/ Charles J. Yash
----------------------
Charles J. Yash,
Attorney-in-fact
23
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors and Shareholders
of Callaway Golf Company:
Our audits of the consolidated financial statements referred to in our report
dated January 26, 2000, appearing in the 1999 Annual Report to Shareholders of
Callaway Golf Company (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Diego, California
January 26, 2000
24
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For The Three Year Period Ended December 31, 1999
Allowance Allowance Allowance Valuation Allowance
for Doubtful for Obsolete for Warranty For Deferred
Date Accounts Inventory Costs Tax Assets
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 6,337 $ 5,284 $ 27,303
---------------------------------------------------------------------
Provision 1,354 743 13,726
Write-off, net (645) (353) (12,970)
---------------------------------------------------------------------
Balance, December 31, 1997 7,046 5,674 28,059
---------------------------------------------------------------------
Provision 4,171 33,214 24,681 $1,759
Write-off, net (1,278) (2,040) (16,925)
-----------------------------------------------------------------------
Balance, December 31, 1998 9,939 36,848 35,815 1,759
-----------------------------------------------------------------------
Provision 655 2,649 18,023 2,919
Write-off, net (5,303) (24,503) (17,733) (488)
-----------------------------------------------------------------------
Balance, December 31, 1999 $ 5,291 $ 14,994 $ 36,105 $4,190
=======================================================================
25
EXHIBIT INDEX
EXHIBITS
- --------
3.1 Certificate of Incorporation, incorporated herein by this reference
to Exhibit 3.1 to the Company's Current Report on Form 8-K, as filed
with the Securities and Exchange Commission ("Commission") on July 1,
1999 (file no. 1-10962).
3.2 Bylaws, incorporated herein by this reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K, as filed with the Commission on
July 1, 1999 (file no. 1-10962).
4.1 Dividend Reinvestment and Stock Purchase Plan, incorporated herein
by this reference to the Prospectus in the Company's Registration
Statement on Form S-3, as filed with the Commission on March 29, 1994
(file no. 33-77024).
4.2 Rights Agreement by and between the Company and Chemical Mellon
Shareholder Services as Rights Agent dated as of June 21, 1995,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
4.3 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series A Junior Participating Preferred Stock,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962).
Executive Compensation Contracts/Plans
10.1 Chairman and Founder Employment Agreement by and between the Company
and Ely Callaway entered into as of January 1, 1997, incorporated
herein by this reference to the corresponding exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, as filed with the Commission on August 14, 1997 (file no.
1-10962).
10.2 First Amendment to Chairman and Founder Employment Agreement
effective December 31, 1999 between the Company and Ely Callaway. +
10.3 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Charles J. Yash. +
10.4 Stock Option Agreement by and between the Company and Charles J. Yash
dated as of May 10, 1996, incorporated herein by this reference to
the corresponding exhibit in the Company's Registration Statement on
Form S-8, as filed with the Commission on June 11, 1996 (file no.
333-5721).
10.5 Executive Officer Employment Agreement by and between the Company and
Richard Helmstetter entered into as of January 1, 1998, incorporated
herein by this reference to the corresponding exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, as filed with the Commission on March 31, 1998 (file no. 1-
10962).
26
10.6 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Ronald A. Drapeau .+
10.7 Executive Officer Employment Agreement, entered into as of January 1,
2000, between the Company and Steven C. McCracken. +
10.8 Executive Officer Employment Agreement, entered into as of December
21, 1999, between the Company and Mick McCormick. +
10.9 Employment Agreement, entered into as of January 1, 2000, between the
Company and Bruce Parker. +
10.10 Resignation Agreement and General Release effective November 23,
1999 between the Company and Frederick R. Port. +
10.11 Release between Frederick R. Port and the Company. +
10.12 Agreement between the Company and Donald H. Dye dated as of October
15, 1998, incorporated herein by this reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, as
filed with the Commission on March 31, 1998 (file no. 1-10962).
10.13 Consulting Agreement between the Company and Donald H. Dye dated as
of October 15, 1998, incorporated herein by this reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.14 Form of Tax Indemnification Agreement, incorporated herein by this
reference to the corresponding exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, as filed
with the Commission on August 12, 1995 (file no. 1-10962).
10.15 Amendment No. 1 to Form of Tax Indemnification Agreement,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1996, as filed with the Commission on November 13, 1996
(file no. 1-10962).
10.16 Executive Deferred Compensation Plan (as amended and restated,
effective January 1, 1998), incorporated herein by this reference to
the corresponding exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, as filed with the
Commission on May 17, 1998 (file no. 1-10962).
10.17 Amendment to Executive Deferred Compensation Plan dated as of January
1, 1999, incorporated herein by this reference to the Company's
Quarterly report on Form 10-Q for the quarter ended March 31, 1999,
as filed with the Commission on May 17, 1999 (file no. 1-10962).
10.18 Callaway Golf Company 1998 Executive Non-Discretionary Bonus Plan,
incorporated herein by this reference to the corresponding exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, as filed with the Commission on May 15, 1997 (file
no. 1-10962).
10.19 1991 Stock Incentive Plan (as amended and restated April 1994),
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1994, as filed with the Commission on March 31, 1995 (file no. 1-
10962).
27
10.20 Amended and Restated Stock Option Plan effective April 2, 199 1,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995, as filed with the Commission on April 1, 1996 (file no. 1-
10962).
10.21 1996 Stock Option Plan (as amended and restated through April 23,
1998), incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998, as filed with the Commission on August 14, 1998
(file no. 1-10962).
10.22 Callaway Golf Company 1998 Stock Incentive Plan effective February
18, 1998, incorporated herein by this reference to the corresponding
exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, as filed with the Commission on August
14, 1998 (file no. 1-10962 ).
10.23 Callaway Golf Company Non-Employee Directors Stock Option Plan (as
amended and restated through August 17, 1999), incorporated herein by
this reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, as filed with the Commission on November 15, 1999 (file no. 1-
10962).
10.24 Indemnification Agreement by and between Callaway Golf Company and
William C. Baker dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.25 Indemnification Agreement by and between Callaway Golf Company and
Vernon E. Jordan, Jr. dated as of July 1, 1999, incorporated herein
by this reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, as filed with the Commission on
August 16, 1999 (file no. 1-10962).
10.26 Indemnification Agreement by and between Callaway Golf Company and
Yotaro Kobayashi dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.27 Indemnification Agreement by and between Callaway Golf Company and
Aulana L. Peters dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
10.28 Indemnification Agreement by and between Callaway Golf Company and
Richard L. Rosenfield dated as of July 1, 1999, incorporated herein
by this reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, as filed with the Commission on
August 16, 1999 (file no. 1-10962).
28
10.29 Indemnification Agreement by and between Callaway Golf Company and
William A. Schreyer dated as of July 1, 1999, incorporated herein by
this reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, as filed with the Commission on August
16, 1999 (file no. 1-10962).
Other Contracts
10.30 Credit Agreement dated as of December 30, 1998, among Callaway Golf
Company, the other Credit Parties signatory thereto, the Lenders
signatory thereto from time to time and General Electric Capital
Corporation , as Agent for the Lenders, incorporated herein by this
reference to the corresponding exhibit to the Company's Current
Report on Form 8-K dated January 28, 1999, as filed with the
Commission on January 28, 1999 (file no. 1-10962).
10.31 Amended and Restated Credit Agreement dated as of February 10, 1999,
among Callaway Golf Company, as Borrower, the other credit parties
signatory thereto, as Credit Parties, the Lenders signatory thereto
from time to time and General Electric Capital Corporation , as Agent
and Lender, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.32 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Sales Company and Odyssey Golf, Inc, incorporated
herein by this reference to the corresponding exhibit to the
Company's Current Report on Form 8-K dated February 25, 1999, as
filed with the Commission on February 25, 1999 (file no. 1-10962).
10.33 Receivables Transfer Agreement dated as of February 10, 1999, by and
among Callaway Golf Company, as Parent Guarantor, Callaway Golf Sales
Company, as the CGS Originator and as Servicer, and Golf Funding
Corporation, incorporated herein by this reference to the
corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.34 Receivables Purchase and Servicing Agreement dated as of February 10,
1999, by and among Golf Funding Corporation, as Seller, Redwood
Receivables Corporation, as Purchaser, Callaway Golf Sales Company,
as Servicer, and General Electric Capital Corporation, as Operating
Agent and Collateral Agent, incorporated herein by this reference to
the corresponding exhibit to the Company's Current Report on Form 8-K
dated February 25, 1999, as filed with the Commission on February 25,
1999 (file no. 1-10962).
10.35 Trust Agreement between Callaway Golf Company and Sanwa Bank
California, as Trustee, for the benefit of participating employees,
dated July 14, 1995, incorporated herein by this reference to the
corresponding exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, as filed with the
Commission on November 14, 1995 (file no. 1-10962).
10.36 Loan Forgiveness Agreement effective as of March 8, 1999, by and
among Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.37 Membership Interest Purchase Agreement effective as of March 8, 1999,
by and among Callaway Golf Company and Callaway Editions, Inc.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
29
10.38 Loan Termination Agreement effective as of March 10, 1999, by and
among Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
10.39 Trademark License Agreement effective as of March 9, 1999, by and
between Callaway Golf Company and Callaway Golf Media Ventures, LLC.,
incorporated herein by this reference to the corresponding exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998, as filed with the Commission on March 31, 1999 (file no. 1-
10962).
13.1 Portions of the Company's 1999 Annual Report to Shareholders (with
the exception of the information incorporated by reference
specifically in this Report on Form 10-K, the 1999 Annual Report to
Shareholders is not deemed to be filed as a part of this Report on
Form 10-K).
21.1 List of Subsidiaries. +
23.1 Consent of Independent Accountants. +
24.1 Powers of Attorney.+
27.1 Financial Data Schedule for the Year Ended December 31, 1999.+
+ Included in this Report
(b) Reports on Form 8-K:
None.
30