UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10962
CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)
California 95-3797580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2285 Rutherford Road, Carlsbad, CA 92008-8815
(619) 931-1771
(Address, including zip code and telephone number, including area code,
of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the issuer's of Common Stock, $.01 par
value, as of July 31, 1996 was 72,484,172.
1
CALLAWAY GOLF COMPANY
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at June 30, 1996
and December 31, 1995 3
Consolidated Condensed Statement of Income for the three
months and six months ended June 30, 1996 and 1995 4
Consolidated Condensed Statement of Cash Flows for the six
months ended June 30, 1996 and 1995 5
Consolidated Condensed Statement of Shareholders' Equity for
the six months ended June 30, 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Part II. Other Information 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
June 30, December 31,
1996 1995
---------- -----------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 105,854 $ 59,157
Accounts receivable, net 88,869 73,906
Inventories, net 77,187 51,584
Deferred taxes 24,825 22,688
Other current assets 3,487 2,370
--------- ---------
Total current assets 300,222 209,705
Property and equipment, net 75,178 69,034
Other assets 20,296 11,236
--------- ---------
$ 395,696 $ 289,975
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 32,888 $ 26,894
Accrued employee compensation and benefits 21,302 10,680
Accrued warranty expense 26,995 23,769
Income taxes payable 17,181 1,491
--------- ---------
Total current liabilities 98,366 62,834
Long-term liabilities 2,988 2,207
Commitments (Note 10)
Shareholders' equity:
Preferred Stock, $.01 par value 3,000,000 shares
authorized, none issued and outstanding at June 30, 1996
and December 31, 1995, respectively 0 0
Common Stock, $.01 par value 240,000,000 shares
authorized, 72,181,936 and 70,912,129 issued and
outstanding at June 30, 1996 and
December 31, 1995, respectively 722 709
Paid-in capital 289,546 214,846
Unearned compensation (1,844) (2,420)
Retained earnings 182,143 131,712
Less: Grantor Stock Trust (5,300,000 shares)
at market (Note 9) (176,225) (119,913)
--------- ---------
Total shareholders' equity 294,342 224,934
--------- ---------
$ 395,696 $ 289,975
========= =========
See accompanying notes to consolidated condensed financial statements.
3
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three months ended Six months ended
--------------------------------------- ------------------------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
--------------------------------------- ------------------------------------------
Net sales $210,002 100% $155,699 100% $345,140 100% $274,724 100%
Cost of goods sold 98,919 47% 75,863 49% 165,425 48% 134,411 49%
-------- -------- -------- --------
Gross profit 111,083 53% 79,836 51% 179,715 52% 140,313 51%
Selling expenses 21,853 10% 17,082 11% 39,998 12% 36,695 13%
General and administrative expenses 24,925 12% 16,274 10% 42,116 12% 27,894 10%
Research and development costs 3,245 2% 2,277 1% 6,407 2% 4,277 2%
-------- -------- -------- --------
Income from operations 61,060 29% 44,203 28% 91,194 26% 71,447 26%
Other income, net 1,470 964 2,333 1,645
-------- -------- -------- --------
Income before income taxes 62,530 30% 45,167 29% 93,527 27% 73,092 27%
Provision for income taxes 23,593 17,838 35,135 28,858
-------- -------- -------- --------
Net income $ 38,937 19% $ 27,329 18% $ 58,392 17% $ 44,234 16%
======== ======== ======== ========
Earnings per common share $.55 $.39 $.83 $.62
Common equivalent shares 70,504 70,074 70,049 71,217
Dividends paid per share $.06 $.05 $.12 $.10
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
4
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended
---------------------------
June 30, June 30,
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 58,392 $ 44,234
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 6,205 5,099
Loss on disposal of fixed assets 12 0
Non-cash compensation 2,202 896
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (14,920) (28,199)
Inventories, net (25,554) 10,741
Deferred taxes (2,974) 1,787
Other assets (9,345) 4
Accounts payable and accrued expenses 5,877 1,775
Accrued employee compensation
and benefits 10,617 7,970
Accrued warranty expense 3,225 3,025
Income taxes payable 15,690 10,759
Other liabilities 781 134
-------- --------
Net cash provided by operating activities 50,208 58,225
-------- --------
Cash flows from investing activities:
Capital expenditures (12,361) (9,125)
Intangible assets 9 0
-------- --------
Net cash used in investing activities (12,352) (9,125)
-------- --------
Cash flows from financing activities:
Issuance of Common Stock 8,812 2,519
Tax benefit from exercise of stock options 7,963 4,886
Dividends paid (7,960) (6,826)
Retirement of Common Stock 0 (41,903)
-------- --------
Net cash provided (used in) financing activities 8,815 (41,324)
-------- --------
Effect of exchange rate changes on cash 26 17
-------- --------
Net increase in cash and cash equivalents 46,697 7,793
Cash and cash equivalents at beginning of period 59,157 54,356
-------- --------
Cash and cash equivalents at end of period $105,854 $ 62,149
======== ========
See accompanying notes to consolidated condensed financial statements.
5
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
Common Shares Paid-in Unearned Retained
Stock Amount Capital Compensation Earnings GST Total
------- ------- -------- ------------ --------- --------- -----
Balance, December 31, 1995 70,912 $709 $214,846 ($2,420) $131,712 ($119,913) $224,934
Exercise of stock options 1,171 12 8,800 8,812
Tax benefit from exercise of
stock options 7,963 7,963
Compensatory stock options 336 576 912
Compensatory stock 99 1 1,289 1,290
Cash dividends (8,596) (8,596)
Dividends on shares held by GST 636 636
Equity adjustment from foreign
currency translation (1) (1)
Adjustment of GST shares to
market value 56,312 (56,312)
Net income 58,392 58,392
------ ---- -------- ------- -------- --------- --------
Balance, June 30, 1996 72,182 $722 $289,546 ($1,844) $182,143 ($176,225) $294,342
====== ==== ======== ======= ======== ========= ========
See accompanying notes to consolidated condensed financial statements.
6
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1
The accompanying consolidated condensed balance sheet as of June 30, 1996 and
the consolidated condensed statements of income, cash flows and shareholders'
equity for the six month periods ended June 30, 1996 and 1995 have been prepared
by Callaway Golf Company (the Company) and have not been audited. These
financial statements, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial position, results of operations and cash flows for all periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K filed for the year ended December 31, 1995. Interim operating
results are not necessarily indicative of operating results for the full year.
The consolidated condensed financial statements include the accounts of the
Company and its wholly owned subsidiaries, Callaway Golf Sales Company, Callaway
Golf (UK) Limited and Callaway Golf Ball Company. All significant intercompany
transactions and balances have been eliminated.
Note 2
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3
Earnings per common share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period increased by
dilutive common stock equivalents using the treasury stock method. Fully diluted
earnings per share was substantially the same as primary earnings per share for
the periods ended June 30, 1996 and 1995, respectively. Shares owned by the
Callaway Golf Company Grantor Stock Trust are included in the number of weighted
average shares outstanding using the treasury stock method with assumed proceeds
from exercise equal to the aggregate closing price of those shares at the end of
the reporting period. The dilutive effect of rights to purchase preferred or
common shares under the Callaway Golf Shareholder Rights Plan have not been
included in weighted average share amounts as the conditions necessary to cause
these rights to be exercised were not met.
Note 4
Inventories at June 30, 1996 and December 31, 1995 consisted of:
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
(in thousands)
Inventories:
Raw materials $47,239 $23,980
Work-in-process 1,856 1,109
Finished goods 32,738 31,291
------- -------
81,833 56,380
Less reserve for obsolescence (4,646) (4,796)
------- -------
Net inventories $77,187 $51,584
======= =======
7
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 5
The provision for income taxes is as follows:
Six months ended Six months ended
June 30, 1996 June 30, 1995
----------------- -----------------
(Unaudited) (Unaudited)
(in thousands)
Current tax provision:
Federal $31,637 $20,581
State 6,127 5,497
Foreign 368 903
Deferred tax (benefit) expense:
Federal (2,462) 1,365
State (524) (45)
Foreign (11) 557
------- -------
$35,135 $28,858
======= =======
Deferred tax assets are comprised of the following:
June 30, December 31,
1996 1995
------- -----------
(Unaudited)
(in thousands)
Reserves and allowances $18,025 $16,381
Depreciation and amortization 5,094 4,297
Deferred compensation 2,219 2,019
Compensatory stock options and rights 1,406 1,346
Effect of inventory overhead adjustment 1,274 1,414
State taxes, net 830 972
Other 1,160 605
------- -------
Net deferred tax assets $30,008 $27,034
======= =======
8
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 6
On May 21, 1996, the Company paid a quarterly dividend of $.06 per share to
shareholders of record on April 30, 1996. Additionally, on July 17, 1996, the
Company declared a quarterly dividend of $.06 per share payable August 20, 1996
to shareholders of record on July 30, 1996.
Note 7
During the six months ended June 30, 1996, the Company entered into forward
foreign currency exchange rate contracts to hedge payments due on intercompany
transactions from its wholly owned foreign subsidiary. The effect of this
practice is to minimize variability in the Company's operating results arising
from foreign exchange rate movements. The Company does not engage in foreign
currency speculation. These foreign exchange contracts do not subject the
Company to risk due to exchange rate movements because gains and losses on these
contracts offset losses and gains on the intercompany transactions being hedged,
and the Company does not engage in hedging contracts which exceed the amount of
the intercompany transactions. At June 30, 1996, the Company had approximately
$5,603,000 of foreign exchange contracts outstanding. The contracts mature
between July and September of 1996. Realized and unrealized losses on these
contracts are recorded in net income. The net realized and unrealized losses
from foreign exchange contracts for the six months ended June 30, 1996 totaled
approximately $18,000.
Note 8
At June 30, 1996, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $92.4 million.
Management determines the appropriate classification of its U.S. Government and
other debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has included these securities, net
of amortization, in cash and cash equivalents and has designated them as "held-
to-maturity."
Note 9
The Company's Grantor Stock Trust (GST) holds 5,300,000 shares of Company stock
at June 30, 1996. During the term of the GST, shares in the GST may be used to
fund the Company's obligations with respect to one or more of the Company's non-
qualified or qualified employee benefit plans. Shares owned by the GST are
accounted for as a reduction to shareholders' equity until used in connection
with employee benefits. Each period the shares owned by the GST are valued at
the closing market price, with corresponding changes in the GST balance
reflected in capital in excess of par value. These shares have no impact on the
net amount of shareholders' equity.
In 1995, the Company implemented a plan to protect shareholders' rights in the
event of a proposed takeover of the Company. Under the plan, each share of the
Company's outstanding Common Stock carries one Right to Purchase Series "A"
Junior Participating Preferred Stock ("the Right"). The Right entitles the
holder, under certain circumstances, to purchase Common Stock of Callaway Golf
Company or of the acquiring company at a substantially discounted price ten days
after a person or group publicly announces it has acquired or has tendered an
offer for 15% or more of the Company's outstanding Common Stock. The Rights are
redeemable by the Company at $.01 per Right and expire in 2005.
Note 10
In the normal course of business, the Company enters into certain long term
purchase commitments with various vendors. The Company has agreements with one
of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 2,000,000 graphite shafts, or 25% of all graphite
shafts required in the manufacture of its golf clubs, whichever is greater,
through December 31, 1997, and 25% of all graphite shaft requirements from
January 1998 through May 1998.
9
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
In April 1996, the Company entered into a clubhead supply agreement with one of
its suppliers to purchase, under certain conditions, titanium clubheads costing
up to a maximum of $97,500,000 for the remainder of 1996 through December 1997.
This agreement is cancelable by the Company at any time by giving six months
notice.
Effective June 1995, the Company agreed to form a joint venture with Sturm,
Ruger & Company, Inc. (Sturm, Ruger), its main supplier of Great Big Bertha(R)
titanium heads, to construct a foundry that would significantly increase Sturm,
Ruger's capacity to produce heads. Under the terms of the joint venture
agreements, the Company shall have a 50% equity interest in the new foundry and
is required to contribute up to $7,000,000 in capital contributions for
developing, designing, equipping and operating the new facility. The Company
accounts for its investment in the joint venture pursuant to the equity method.
As of June 30, 1996, the Company had made capital contributions of $4,128,000 to
the joint venture, which had not commenced operations. While it was
comtemplated in 1995 that the Company would purchase from Sturm, Ruger and the
joint venture at competitive prices a minimum quantity of club heads in 1996,
1997 and 1998, costing up to about $42,000,000 per year, delays and cost
overruns in the joint venture project, improved production at Sturm, Ruger and
the development of new alternative sources for quality titanium castings at
significantly lower prices than those originally contemplated for the joint
venture have prompted the parties to enter into discussions about the continuing
need for the joint venture.
Note 11
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." The Company
will continue to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Adoption of SFAS 123 will
not have a material impact on the Company's financial position or results of
operations for the year ending December 31, 1996.
Note 12
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The new standard requires that the
Company investigate potential impairments of long-lived assets, certain
identifiable intangibles, and associated goodwill, on an exception basis, when
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss would be recognized when the sum of
the expected future net cash flows is less than the carrying amount of the
asset. Adoption of SFAS 121 did not have a material impact on the Company's
financial position or results of operations.
Note 13
On May 30, 1996, a lawsuit was filed against Callaway Golf Company and two of
its officers by a former officer of the Company. The lawsuit asserts claims for
breach of oral contract, fraud, negligent misrepresentation, declaratory
judgment, rescission, restitution and accounting, arising out of an alleged oral
promise in connection with the assignment of a patent for certain tooling
designs. The complaint seeks damages of $290,000 000, a royalty of $27,000,000
or compensatory damages for breach of alleged oral contract, as well as
unspecified punitive damages and costs. The Company is vigorously defending the
suit, and believes that it has good and valid defenses to the claims and that
the suit will not have a material adverse effect upon the Company's financial
position or results of operations.
Note 14
On July 1, 1996 the Company acquired an 80% ownership interest in its German
distributor, Golf Trading GmbH. This acquisition was made through the formation
of Callaway Golf (Germany) GmbH (a wholly owned subsidiary) which acquired 80%
of the outstanding common stock of Golf Trading GmbH.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
When used in this discussion, the words "believes," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. 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 are
also urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors Affecting the Golf Club Industry and Callaway
Golf" in this Report, as well as the Company's other periodic reports on Forms
10-K, 10-Q and 8-K filed with the Securities and Exchange Commission.
Results of Operations
Three-month periods ended June 30, 1996 and 1995:
Net sales increased 35% to $210.0 million for the three months ended June 30,
1996 compared to $155.7 million for the same period in the prior year. This
increase was primarily attributable to increased sales of Great Big Bertha(R)
Drivers and the introduction of Great Big Bertha(R) Fairway Woods in January
1996, for which shipments in limited quantities began in March 1996, combined
with increased sales of Big Bertha(R) Irons. These sales increases were offset
by a decrease in net sales of Big Bertha(R) War Bird(R) Metal Woods.
For the three months ended June 30, 1996, gross profit increased to $111.1
million from $79.8 million for the same period in the prior year and gross
margin increased to 53% from 51%. The increase in gross profit was primarily
the result of decreases in material costs and manufacturing labor and overhead
costs related to increased production volume.
Selling expenses increased to $21.9 million in the second quarter of 1996
compared to $17.1 million in the second quarter of 1995. As a percentage of net
sales, selling expenses in the second quarter decreased to 10% from 11% for the
same period in 1995. The decrease as a percentage of net sales was primarily
attributable to costs being spread over a larger sales volume. The $4.8 million
increase was primarily a result of increased sales representatives' salaries and
commission expense in the quarter due to a new compensation package under which
such expenses are incurred more evenly throughout the year, combined with
increases in advertising, tour endorsement and promotional expenses.
General and administrative expenses for the three months ended June 30, 1996
increased to $24.9 million from the $16.3 million incurred during the second
quarter of 1995. As a percentage of net sales, general and administrative
expenses increased to 12% for the second quarter of 1996 from 10% for the same
period in 1995. The $8.6 million increase in general and administrative
expenses was primarily attributable to increased employee compensation and
benefits, costs associated with the Company's business development initiatives
and legal expenses incurred to protect against infringement of the Company's
patents and trademarks.
Research and development expenses were $3.2 million for the three months ended
June 30, 1996 as compared to $2.3 million for the same period in the prior year.
The increase in research and development costs was attributable to increased
personnel and operating expenses.
Six month periods ended June 30, 1996 and 1995:
For the six months ended June 30, 1996, net sales increased 26% to $345.1
million compared to $274.7 million for the same period in the prior year. This
increase was primarily attributable to increased sales of Great Big Bertha(R)
Drivers and Great Big Bertha(R) Fairway Woods.
For the six months ended June 30, 1996, gross profit increased to $179.7
million from $140.3 million for the same period in the prior year and gross
margin increased to 52% from 51%. The increase in gross margin was primarily
the result of decreases in material costs and manufacturing labor and overhead
costs related to increased production volume.
11
Selling expenses increased to $40.0 million from $36.7 million for the six
months ended June 30, 1996 compared to the same period in the prior year. As a
percentage of net sales, selling expenses in the first half of 1996 decreased to
12% from 13% for the same period in 1995. The decrease as a percentage of net
sales was primarily attributable to costs being spread over a larger sales
volume.
General and administrative expenses for the six months ended June 30, 1996
increased to $42.1 million from the $27.9 million incurred during the six months
ended June 30, 1995. The $14.2 million increase was primarily attributable to
increased employee compensation and benefits, costs associated with the
Company's business development initiatives and increases in charitable
contributions, computer support, legal and depreciation expenses.
Research and development expenses were $6.4 million for the six months ended
June 30, 1996 as compared to $4.3 million for the same period in the prior year.
The increase in research and development costs is attributable to increased
personnel and operating expenses.
Certain Factors Affecting Callaway Golf Company
The Company believes that the growth rate in the golf equipment industry in
the United States has been modest for the past several years, and this trend is
likely to continue through 1996. Sales of all golf clubs in Japan, the world's
second largest consumer of golf clubs next to the United States, appear to be
stabilizing during 1996 after a decline prior to 1996. Although demand for the
Company's products has been generally strong throughout this period, no
assurances can be given that the demand for the Company's existing products or
the introduction of new products will continue to permit the Company to
experience its historical growth or maintain its historical profit margin.
Additionally, given the Company's current size and market position, it is
possible that further market penetration will prove more difficult.
In the golf equipment industry, sales to retailers are generally seasonal due
to lower demand in the retail market in the cold weather months covered by the
fourth and first quarters. Although the Company's business generally follows
this seasonal trend, the success of the Company over the past several years has
tended to mitigate the impact of seasonality on the Company's operating results.
Beginning in the current year, the Company expects that its operating results
will be more significantly affected by seasonal buying trends.
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. Several companies introduced new products in 1996 (e.g.
Ping "ISI" irons, Taylor Made "Burner Bubble Shaft" irons and Cobra "Ti"
titanium metal woods) that have generated increased market competition. Others
increased their marketing activities with respect to existing products in 1996.
While the Company believes that its products and its marketing efforts continue
to be competitive, there can be no assurance that these actions by others will
not negatively impact the Company's future sales. Additionally, the golf club
industry, in general, has been characterized by widespread imitation of popular
club designs. A manufacturer's ability to compete is in part dependent upon its
ability to satisfy 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 also 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 Company began shipping significant quantities of its Great Big Bertha(R)
Drivers in March 1995, and began shipping Great Big Bertha(R) Fairway Woods in
March of 1996. This product line is an important part of the Company's
business. Great Big Bertha(R) Metal Woods have a titanium club head and are
priced substantially higher than the Company's stainless steel product line. The
Company currently has three sources for its titanium club heads, but is
currently receiving the vast majority of its club heads from two vendors. While
the Company has been successful thus far in acquiring adequate quantities of
high quality titanium castings at acceptable prices, there is no guarantee that
its current suppliers will continue to meet those needs and/or new suppliers
will be identified. Several of the Company's competitors have introduced or
announced plans to introduce their own titanium metal wood products at
substantially lower wholesale prices. These new products will increase the
competitive pressure on the Company's future titanium
12
metal wood sales.
The Company believes that the introduction of new, innovative golf
equipment will be important to its future success. New models and basic design
changes are frequently introduced into the golf equipment market but are often
met with consumer rejection. Although the Company has achieved certain
successes in the introduction of its golf clubs, no assurances can be given that
the Company will be able to continue to design and manufacture golf clubs that
achieve market acceptance. In addition, prior successful designs may be
rendered obsolete within a relatively short period of time as new products are
introduced into the market. The design of new golf equipment is also greatly
influenced by rules and interpretations of the United States Golf Association
("USGA"). Although the golf equipment standards established by the USGA
generally apply only to competitive events sanctioned by that organization, it
has become critical for designers of new clubs to assure compliance with USGA
standards. While the Company believes that all of its clubs comply with USGA
standards, no assurance can be given that any new products will receive USGA
approval or that existing USGA standards will not be altered in ways that
adversely affect the sales of the Company's products.
In May 1996, the Company announced its plans to enter the golf ball
business. In June 1996, the Company formed Callaway Golf Ball Company ("CGB"),
a wholly owned subsidiary of Callaway Golf Company. To date, the Company has
not introduced a golf ball product and it is uncertain if and when a successful
golf ball product will be achieved. At this time, it has not been determined
whether CGB will enter the golf ball business by developing a new product, by
acquiring an existing golf ball manufacturer, by participating in a joint
venture with another company, or by a combination of these factors. As the golf
ball business is in early stages of development, the impact of this new business
on the Company's future cash flow and income from operations cannot be
determined. The Company believes that factors affecting the golf equipment
industry described above, including growth rate in the golf equipment industry,
seasonality and new product introduction will apply equally to the golf ball
business. There can be no assurance if and when a successful golf ball product
will be developed. In addition, the golf ball business is highly competitive
with a number of well established and well financed competitors including
Titleist, Spalding, Maxfli, Bridgestone and others. These competitors have
established market share in the golf ball business which will need to be
penetrated in order for the Company's golf ball business to be successful.
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 techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. Consequently, if any
significant delay or disruption in the supply of these component parts occurs,
it may have a material adverse effect on the Company's business.
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 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 patents, trademarks, or trade dress.
During 1995 there was an increase in unauthorized distribution of the
Company's products (i.e. product sold by the Company to authorized distributors
being ultimately sold at retail by unauthorized distributors). The Company is
making further efforts to reduce this unauthorized distribution of its products
in both domestic and international markets. While efforts to reduce unauthorized
distribution have had only limited success to date, these efforts could result
in an increase in sales returns over historical levels, and/or a potential
decrease in sales to those customers who are selling Callaway(R) products to
unauthorized distributors.
An increasing number of the Company's competitors have, like the
Company itself, sought to obtain patent, trademark or other protection of their
proprietary rights and designs. From time to time others have or may contact
the Company to claim that they have proprietary rights which have been infringed
by the Company and/or its products. The Company evaluates any such claims and,
where appropriate, has obtained or sought to obtain licenses or other business
arrangements. To date, there have been no interruptions in the Company's
business as the result of any claims of infringement. However, no assurance can
be given that the Company will not be adversely affected 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. Such effect may have a material adverse impact on
the
13
Company.
During 1995, the Company established a department to evaluate
opportunities in and outside of the golf equipment industry. Such ventures will
present new challenges for the Company and there can be no assurance that this
activity will be successful. One of the opportunities identified by this
department relates to the Company's acquisition of selected foreign
distributors. The Company's management believes that controlling the
distribution of its products in these areas will be a key element in the future
growth and success of the Company. Executing this business strategy has and
will result in additional investments in inventory, accounts receivable,
corporate infrastructure and facilities. There can be no assurance that the
acquisition of the Company's foreign distributors will achieve these stated
goals.
Liquidity and Capital Resources
At June 30, 1996, cash and cash equivalents increased to $105.9
million from $59.2 million at December 31, 1995, due to $50.2 million provided
by operating activities and $8.8 million provided by financing activities
primarily related to $8.8 million in stock option exercises. These increases
were offset by $12.3 million used in investing activities associated with
capital expenditures. The Company has available a $50.0 million line of credit
and anticipates that its existing capital resources and cash flow generated from
future operations will enable it to maintain its current level of operations and
its planned operations for the foreseeable future.
The Company's net accounts receivable increased to $88.9 million at
June 30, 1996 from $73.9 million at December 31, 1995 and $58.3 million at June
30, 1995, primarily as a result of the increase in net sales. Net inventory was
$77.2 million at June 30, 1996 compared to $51.6 million at December 31, 1995
and $63.5 million at June 30, 1995. The increase in inventory levels at June
30, 1996 is consistent with historical seasonality trends. Component costs
related to the Great Big Bertha(R) product line which are higher in relation to
other product lines also contributed to the increase in inventory.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The Company, incident to its business activities, is the plaintiff
in several legal proceedings, both domestically and abroad, in various
stages of development. In conjunction with the Company's program of
enforcing its proprietary rights, the Company has initiated a number of
actions against alleged infringers under the Lanham Act, 15 USCA
Sections 1051-1127, the U.S. Patent Act, 35 USCA Sections 1-376, and
other pertinent laws. Some defendants in these actions have, among other
things, contested the validity and/or the enforceability of some of the
Company's patents and/or trademarks. Others have asserted counterclaims
against the Company. The Company believes that the outcome of these
matters individually and in the aggregate will not have a material
adverse effect upon the financial position or results of operations of
the Company. It is possible, however, that in the future one or more
defenses or claims asserted by defendants in those actions may succeed,
resulting in the loss of all or part of the rights under one or more
patents, loss of a trademark, a monetary award against the Company, or
some other loss to the Company. One or more of these results could
adversely affect the Company's overall ability to protect its product
designs and ultimately limit its future success in the market place.
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.
On May 30, 1996, a lawsuit was filed against Callaway Golf Company
and two of its officers by a former officer of the Company, captioned
Glenn Schmidt v. Callaway Golf Company, et al., Case No. N 71548, in
----------------------------------------------
the Superior Court for the State of California, County of San Diego. On
July 10, 1996, the defendants removed the case to the United States
District Court for the Southern District of California, Case No. 961235
B AJB where it currently remains subject to possible remand to the state
court. The lawsuit asserts claims for breach of oral contract, fraud,
negligent misrepresentation, declaratory judgment, rescission,
restitution and accounting, arising out of an alleged oral promise in
connection with the assignment of a patent for certain tooling designs.
The complaint seeks damages of $290,000,000, a royalty of $27,000,000,
or compensatory damages for breach of the alleged oral contract, as well
as unspecified punitive damages and costs. The Company believes that it
has good and valid defenses to the claims, is vigorously defending the
suit, and has asserted its own counterclaims for breach of fiduciary
duty, fraud and negligent misrepresentation.
The Company and its subsidiaries, incident to their business
activities, from time to time are parties to a number of legal
proceedings in various stages of development, including but not limited
to those described above. The Company believes that the majority of
these proceedings involve matters as to which liability, if any, will be
adequately covered by insurance. With respect to litigation outside the
scope of applicable insurance coverage and to the extent insured claims
may exceed liability limits, it is the opinion of the management of the
Company that these matters individually and in the aggregate will not
have a material adverse effect upon the Company.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
On April 18, 1996, the Company held its annual shareholders meeting
at the Company's headquarters in Carlsbad, California. Ely Callaway,
Donald H. Dye, Michael Sherwin, Elmer Ward, William C. Baker, Richard
Rosenfield, William A. Schreyer and Frederick R. Port were elected to
the Board of Directors. Additionally, the
15
adoption of the Company's 1996 Stock Option Plan was approved.
The voting results for the directors were as follows:
Name Votes For Votes Withheld
---- --------- --------------
Ely Callaway 62,457,602 948,734
Donald H. Dye 62,469,971 936,365
Michael Sherwin 62,732,070 674,266
Elmer Ward 60,902,300 2,504,036
William C. Baker 62,771,119 635,217
Richard Rosenfield 62,770,683 635,653
William A. Schreyer 62,720,007 686,329
Frederick R. Port 62,476,824 929,512
The voting results for the Callaway Golf Company 1996 Stock Option Plan
were as follows:
Votes For Votes Against Abstain Broken Non-Vote
--------- ------------- ------- ---------------
50,439,884 12,135,588 830,864 -0-
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
3.2 Bylaws of the Company (as amended through May 10, 1996)/(1)/
10.9 Officer Employment Agreement by and between the Company and
Charles Yash dated May 10, 1996.
10.15 Callaway Golf Company Non-Employee Directors Stock Option
Plan (as Amended and Restated April 17, 1996)
10.17 Stock Option Agreement by and between the Company and
Charles Yash/(2)/
11.1 Statement re: Computation of Earnings Per Common Share
27 Financial Data Schedule
/(1)/ Included as an exhibit to the Company's Registration
Statement on Form S-8 (No. 333-5719) for its 1996 Stock Option Plan
as filed with the Securities and Exchange Commission on June 11,
1996, and incorporated herein by reference.
/(2)/ Included as an exhibit in the Company's Registration
Statement on Form S-8 (No. 333-5721) for the Stock Option Agreement
by and between the Company and Charles Yash as filed with the
Securities and Exchange Commission on June 11, 1996, and
incorporated herein by reference.
b. Reports on Form 8-K:
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: August 13, 1996 /s/ Donald H. Dye
--------------------------------
DONALD H. DYE
President
Chief Executive Officer
/s/ David A. Rane
--------------------------------
DAVID A. RANE
Executive Vice President
Chief Financial Officer
17
EXHIBIT 10.9
OFFICER EMPLOYMENT AGREEMENT
This Officer Employment Agreement ("Agreement") is entered into as of
May 10, 1996, by and between Callaway Golf Company, a California corporation
(the "Company"), and Charles Yash ("Employee").
1. TERM. The Company hereby employs Employee and Employee hereby
----
accepts employment pursuant to the terms and provisions of this Agreement for
the term commencing May 15, 1996 and terminating May 14, 2001 unless this
Agreement is earlier terminated as hereinafter provided. Unless such employment
is earlier terminated, upon the expiration of the term of this Agreement,
Employee's status shall be one of at will employment.
2. SERVICES.
--------
(a) Employee shall serve as President and Chief Executive Officer of
Callaway Golf Ball Company (a wholly-owned subsidiary or a division of Callaway
Golf Company, to be formed). Employee shall report to Ely Callaway, Chairman
and CEO of the Company, who will serve as Chairman of Callaway Golf Ball
Company, or his successor. Employee shall also serve on the Board of Directors
of Callaway Golf Ball Company, and shall be nominated to serve on the Board of
Directors of Callaway Golf Company. Employee's title, position and/or duties
may be changed by the Board of Directors and/or the Chief Executive Officer of
the Company, subject to the provisions of subsection 8(d).
(b) Employee shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.
3. SERVICES TO BE EXCLUSIVE. During the term hereof, Employee agrees
------------------------
to devote his or her full productive time and best efforts to the performance of
Employee's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors and its Chief Executive Officer. Employee further
agrees, as a condition to the performance by the Company of each and all of its
obligations hereunder, that so long as Employee is employed by the Company,
Employee will not directly or indirectly render services of any nature to,
otherwise become employed by, or otherwise participate or engage in any other
business without the Company's prior written consent. Employee further agrees
to execute such secrecy, non-disclosure, patent, trademark, copyright and other
proprietary rights agreements, if any, as the Company may from time to time
reasonably require (a copy of the Company's current form for such agreements
having been delivered to Employee contemporaneously with this Agreement).
Nothing herein contained shall be deemed to preclude Employee from having
outside personal investments and involvement with appropriate community
activities, and from devoting a reasonable amount of time to such matters,
provided that this shall in no manner interfere with or derogate from
Employee's work for the Company.
4. COMPENSATION. The Company agrees to pay Employee:
------------
(a) a base salary at the rate of $500,000.00 per year through April
30, 1999, and at the rate of $600,000.00 per year thereafter;
(b) an opportunity to earn an annual nondiscretionary bonus based upon
participation in the Company's Executive Nondiscretionary Bonus Plan as it may
exist from time to time; and
(c) an opportunity to earn an annual discretionary bonus based upon
participation in the Company's Executive Discretionary Bonus Plan as it may
exist from time to time, such discretionary bonus for 1996 not to be less than
50% of Employee's base salary paid in 1996, and otherwise as to later years in
amounts established solely in the discretion of the Company.
5. EXPENSES AND BENEFITS.
---------------------
(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse
Employee for all reasonable, customary, and necessary expenses incurred in the
performance of Employee's duties hereunder. Employee shall first account for
such expenses by submitting a signed statement itemizing such expenses prepared
in accordance with the policy set by the Company for reimbursement of such
expenses. The amount, nature, and extent of such expenses shall always be
subject to the control, supervision, and direction of the Company and its Chief
Executive Officer.
(b) Vacation. Employee shall receive four (4) weeks paid vacation for
--------
each twelve (12) month period of employment with the Company. The vacation may
be taken any time during the year subject to prior approval by the Company, such
approval not to be unreasonably withheld. Any unused time will accrue from year
to year. The maximum vacation time Employee may accrue shall be three times
Employee's annual vacation benefit. The Company reserves the right to pay
Employee for unused, accrued vacation benefits in lieu of providing time off.
(c) Benefits. During Employee's employment with the Company pursuant
--------
to this Agreement, the Company shall provide for Employee to:
(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;
(ii) receive, if Employee is insurable under usual underwriting
standards, term life insurance coverage on Employee's life, payable to whomever
the Employee directs, in the face amount of $2,000,000.00, provided that
Employee's
2
physical condition does not prevent Employee from qualifying for such
insurance coverage;
(iii) participate in the Company's 401(k) pension plan pursuant
to the terms of the plan, as the same may be modified from time to time;
(iv) participate in the Company's Executive Deferred Compensation
Plan, as the same may be modified from time to time; and
(v) participate in the Company's program for providing estate and
financial planning services to officers, as the same may be modified from time
to time.
(d) Club Membership. The Company shall pay the reasonable cost of
----------------
initiation associated with Employee gaining privileges at a mutually agreed upon
country club. Employee shall be responsible for all other expenses and costs
associated with such club use, including monthly member dues and charges. The
club membership itself shall belong to and be the property of the Company, not
Employee.
(e) Signing Bonus. Company shall pay Employee a one-time signing
--------------
bonus of $600,000.00, of which $200,000.00 is to be paid to Employee on the date
Employee actually commences employment or the execution date of this Agreement,
whichever is later. The remaining $400,000.00 shall be deferred, without
exception or change, pursuant to the Company's Executive Deferred Compensation
Plan and in accordance with Employee's Enrollment Form in such Plan completed
contemporaneously with the execution of this Agreement.
(f) Stock Options. Pursuant to a separate stock option agreement, the
--------------
Company shall provide to Employee options to purchase up to 600,000 shares of
the Common Stock of the Company in accord with the following pricing and vesting
schedule ("Start Date" means the date on which Employee actually commences
employment with the Company or the date upon which he signs this Agreement
whichever, occurs first.):
SHARES VESTING DATE PRICE
------ ------------------------ ------------------------
200,000 Start Date Base Price (the closing price on the
NYSE on Start Date, as reported in
the Wall Street Journal)
100,000 Start Date + One Year Base Price
100,000 Start Date + Two Years Base Price
100,000 Start Date + Three Years Base Price
100,000 Start Date + Four Years Base Price
All shares of stock that are issuable upon the exercise of such options granted
to
3
Employee shall be registered as promptly as possible with the Securities and
Exchange Commission, and shall be approved for listing on the New York Stock
Exchange upon notice of issuance.
6. DISABILITY. If on account of any physical or mental disability
----------
Employee shall fail or be unable to perform all or substantially all of
Employee's duties under this Agreement for a continuous period of up to six (6)
months during any twelve month period during the term of this Agreement,
Employee shall be entitled to his or her full compensation and benefits as set
forth in this Agreement. If Employee's disability continues after such six (6)
month period, this Agreement is subject to termination pursuant to the
provisions of Section 8(e) hereof.
7. NONCOMPETITION.
--------------
(a) Other Business. To the fullest extent permitted by law, Employee
--------------
agrees that during the term of this Agreement Employee will not, directly or
indirectly (whether as agent, consultant, holder of a beneficial interest,
creditor, or in any other capacity), engage in any business or venture which
engages directly or indirectly in competition with the business of the Company,
or have any interest in any person, firm, corporation, or venture which engages
directly or indirectly in competition with the business of the Company. For
purposes of this section, and by way of example, the ownership of the common
stock of American Brands, parent corporation of Titleist, would be a violation
of this subsection, while the ownership of interests in a broadly based mutual
fund that holds the common stock of American Brands would not.
(b) Other Employees. Except as may be required in the performance of
---------------
his or her duties hereunder, Employee shall not cause or induce, or attempt to
cause or induce, any person now or hereafter employed by the Company, or any
subsidiary, to terminate such employment, nor shall Employee directly or
indirectly employ any person who is now or hereafter employed by the Company for
a period of one (1) year from the date such person ceases to be employed by the
Company.
(c) Suppliers. During the term of this Agreement, and for one (1)
---------
year thereafter, Employee shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.
(d) Conflict of Interest. During the term of this Agreement, Employee
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Employee's duties and obligations
to the Company.
4
8. TERMINATION.
-----------
(a) Termination at the Company's Convenience. Employee's employment
-----------------------------------------
under this Agreement may be terminated by the Company at its convenience at any
time upon giving 90 days or longer notice to Employee. In the event of a
termination at the Company's convenience, Employee shall be entitled to receive
(i) any compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to either (a) the
remainder of the term of this Agreement or (b) six months, whichever is greater;
(iii) the payment of nondiscretionary bonuses pursuant to the Company's
Executive Bonus Plan, as it existed on the date of termination, for a period of
time equal to the greater of the remainder of the term of this Agreement or six
months; (iv) the immediate vesting of all unvested stock options held by
Employee that would have vested had the Employee remained employed pursuant to
this Agreement for a period of time equal to the greater of the remainder of the
term of this agreement or six months; (v) the continuation of all benefits and
perquisites provided by Sections 5(c)(i) and (ii) hereof for a period of time
equal to either (a) the remainder of the term of this Agreement or (b) six
months, whichever is greater; and (vi) no other severance. At Employee's
option, Employee may elect in writing up to 60 days prior to termination to
receive such payments and benefits as provided by subsection (ii) of this
section in a lump sum payment representing all future payments due, discounted
to their then present value at the prevailing major bank prime rate as of the
date of termination.
(b) Termination at Employee's Convenience. Employee's employment
--------------------------------------
under this Agreement may be terminated immediately by Employee at his or her
convenience at any time. In the event of a termination at the Employee's
convenience, Employee shall be entitled to receive (i) any compensation accrued
and unpaid as of the date of termination; (ii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; and (iii) no other severance.
(c) Termination by the Company for Substantial Cause. Employee's
-------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; (ii) severance pay equal to
the nondiscretionary cash bonus Employee would have earned under the then
existing Executive Bonus Plan in the fiscal year in which Employee's employment
is terminated, prorated in accordance with the number of days in such fiscal
year that elapsed prior to Employee's termination and payable at the same time
5
and under the same terms and conditions as any other nondiscretionary bonuses
paid to officers in that fiscal year; and (iii) no other severance.
"Substantial cause" shall mean for purposes of this subsection breach of this
Agreement, or misconduct, including but not limited to, dishonesty, theft, use
or possession of drugs or alcohol during work and/or felony criminal conduct.
(d) Termination by Employee for Substantial Cause. Employee's
----------------------------------------------
employment under this Agreement may be terminated immediately by Employee for
substantial cause at any time. In the event of a termination by Employee for
substantial cause, Employee shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; (ii) the continued payment of
base salary at the same rate and on the same schedule as in effect at the time
of termination for a period of time equal to the greater of the remainder of the
term of this Agreement or six months; (iii) the payment of nondiscretionary
bonuses pursuant to the Company's Executive Bonus Plan, as it existed on the
date of termination, for a period of time equal to the greater of the remainder
of the term of this Agreement or six months; (iv) the immediate vesting of all
unvested stock options held by Employee that would have vested had the Employee
remained employed pursuant to this Agreement for a period of time equal to the
greater of the remainder of the term of this agreement or six months; (v) the
continuation of all benefits and perquisites provided by Sections 5(c)(i) and
(ii) hereof for a period of time equal to the greater of the remainder of the
term of this Agreement or six months; and (vi) no other severance. At
Employee's option, Employee may elect in writing up to 60 days prior to
termination to receive such payments and benefits as provided by subsection (ii)
of this subsection in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination. "Substantial cause" shall mean for purposes of
this subsection a material breach of this Agreement by the Company or a change
in Employee's position or title to a status that is lower in standing than that
of Senior Executive Vice President of the Company or President of a subsidiary
or division of the Company.
(e) Termination Due to Permanent Disability. Subject to all
----------------------------------------
applicable laws, Employee's employment under this Agreement may be terminated
immediately by the Company in the event Employee becomes permanently disabled.
In the event of a termination by the Company due to Employee's permanent
disability, Employee shall be entitled to (i) any compensation accrued and
unpaid as of the date of termination; (ii) the continued payment of base salary
at the same rate and on the same schedule as in effect at the time of
termination for a period of time equal to the greater of the remainder of the
term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) the immediate vesting of outstanding but
unvested stock options held by
6
Employee as of such termination date in a prorated amount based upon the number
of days in the option vesting period that elapsed prior to Employee's
termination; (v) the continuation of all benefits and perquisites provided by
Section 5(c)(i) and (ii) hereof for a period of time equal to the greater of the
remainder of the term of this Agreement or six months; and (vi) no other
severance. Termination under this subsection shall be effective immediately upon
the date the Board of Directors of the Company formally resolves that Employee
is permanently disabled. Subject to all applicable laws, "permanent disability"
shall mean the inability of Employee, by reason of any ailment or illness, or
physical or mental condition, to devote substantially all of his or her time
during normal business hours to the daily performance of Employee's duties as
required under this Agreement for a continuous period of six (6) months, as
reflected in the opinions of three qualified physicians, one of which has been
selected by the Company, one of which has been selected by Employee, and one of
which has been selected by the other two physicians, jointly. At Employee's
option, Employee may elect in writing up to 60 days prior to termination to
receive such payments and benefits as provided by subsection (ii) of this
section in a lump sum payment representing all future payments due, discounted
to their then present value at the prevailing major bank prime rate as of the
date of termination.
(f) Termination Due to Death. Employee's employment under this
-------------------------
Agreement may be terminated immediately by the Company in the event of
Employee's death. In the event of a termination by the Company due to
Employee's death, Employee's estate shall be entitled to (i) any compensation
accrued and unpaid as of the date of termination; (ii) the continued payment of
base salary at the same rate and on the same schedule as in effect at the time
of termination for a period of time equal to the greater of the remainder of the
term of this Agreement or six months; (iii) severance pay equal to the
nondiscretionary cash bonus Employee would have earned under the then existing
Executive Bonus Plan in the fiscal year in which Employee's employment is
terminated, prorated in accordance with the number of days in such fiscal year
that elapsed prior to Employee's termination and payable at the same time and
under the same terms and conditions as any other nondiscretionary bonuses paid
to officers in that fiscal year; (iv) the immediate vesting of outstanding but
unvested stock options held by Employee as of such termination date in a
prorated amount based upon the number of days in the option vesting period that
elapsed prior to Employee's termination; and (v) no other severance. At
Employee's option, Employee may elect in writing at least 60 days prior to
termination to receive such payments and benefits as provided by subsection (ii)
of this section in a lump sum payment representing all future payments due,
discounted to their then present value at the prevailing major bank prime rate
as of the date of termination.
(g) Unless otherwise provided, any severance payments or other amounts
due pursuant to this Section 8 shall be paid in cash within thirty (30) days of
termination. Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8,
7
Employee shall not be entitled to any further compensation, bonus, damages,
restitution, relocation benefits, or other severance benefits upon termination
of employment during the term of this Agreement. The amounts payable to Employee
pursuant to this Section 8 shall not be treated as damages, but as severance
compensation to which Employee is entitled by reason of termination of
employment under the applicable circumstances. The Company shall not be entitled
to set off against the amounts payable to Employee hereunder any amounts earned
by Employee in other employment after termination of his or her employment with
the Company pursuant to this Agreement, or any amounts which might have been
earned by Employee in other employment had Employee sought such other
employment. The provisions of this Section 8 shall not limit Employee's rights
under or pursuant to any other agreement or understanding with the Company or
with Employee's participation in, or terminating distributions and vested rights
under, any pension, profit sharing, insurance or other employee benefit plan of
the Company to which Employee is entitled pursuant to the terms of such plan.
(h) Termination By Mutual Agreement of the Parties. Employee's
----------------------------------------------
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.
(i) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to relieve Employee of his or her duties and/or to require Employee to
vacate his or her office or otherwise remain off the Company's premises prior to
the effective date of termination as determined above, and to cease any and all
activities on the Company's behalf.
9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------
(a) If a Change in Control (as defined in Exhibit A hereto) occurs
before the termination of Employee's employment hereunder, then this Agreement
shall be extended (the "Extended Employment Agreement") in the same form and
substance as in effect immediately prior to the Change in Control, except that
the termination date shall be that date which would permit the Extended
Employment Agreement to continue in effect for an additional period of time
equal to the full term of this Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, if
upon or at any time within one year following any Change in Control that occurs
during the term of this Agreement there is a Termination Event (as defined
below), Employee shall be treated as if he or she had been terminated for the
convenience of the Company and Employee shall be entitled to receive the same
compensation and other benefits and entitlements as are described in Section
8(a) of this Agreement. Furthermore, the termination events and consequences
described in Section 8 shall continue to apply during the term of the Extended
Employment Agreement except that,
8
in the event of a conflict between Section 8 and the rights of Employee
described in this Section 9, the provisions of this Section 9 shall govern.
(c) A "Termination Event" shall mean the occurrence of any one or more
of the following, and in the absence of the Employee's permanent disability
(defined in Sections 6 and 8(e)), Employee's death, and any of the factors
enumerated in Section 8(c) as providing to the Company "substantial cause" for
terminating Employee's employment:
(i) the termination or material breach of this Agreement by the
Company;
(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;
(iii) any material diminishment in the title, position, duties,
responsibilities or status that Employee had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;
(iv) any reduction, limitation or failure to pay or provide any of the
compensation, reimbursable expenses, stock options, incentive programs, or other
benefits or perquisites provided to Employee under the terms of this Agreement
or any other agreement or understanding between the Company and Employee, or
pursuant to the Company's policies and past practices as of the date immediately
prior to the Change in Control; or
(v) any requirement that Employee relocate or any assignment to
Employee of duties that would make it unreasonably difficult for Employee to
maintain the principal residence he or she had immediately prior to the Change
in Control.
10. SURRENDER OF BOOKS AND RECORDS. Employee agrees that upon
------------------------------
termination of employment in any manner, Employee will immediately surrender to
the Company all lists, books and records of or connected with the business of
the Company, and all other properties belonging to the Company, it being
distinctly understood that all such lists, books, records and other documents
are the property of the Company.
11. GENERAL RELATIONSHIP. Employee shall be considered an employee
--------------------
of the Company within the meaning of all federal, state and local laws and
regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
9
12. PROPRIETARY INFORMATION.
-----------------------
(a) Employee agrees that any trade secret or proprietary information
of the Company to which Employee has become privy or may become privy to as a
result of his or her employment with the Company shall not be divulged or
disclosed to any other party (including, without limit, any person or entity
with whom or in whom Employee has a business interest) without the express
written consent of the Company, except as otherwise required by law. In
addition, Employee agrees to use such information only during the term of this
Agreement and only in a manner which is consistent with the purposes of this
Agreement. In the event Employee believes that he or she is legally required to
disclose any trade secret or proprietary information of the Company, Employee
shall give reasonable notice to the Company prior to disclosing such information
and shall take such legally permissible steps as are reasonably necessary to
protect such Company trade secrets or proprietary information, including but not
limited to, seeking orders from a court of competent jurisdiction preventing
disclosure or limiting disclosure of such information beyond that which is
legally required. The Company shall reimburse Employee for reasonable legal
expenses incurred in seeking said orders.
(b) Except as otherwise required by law, Employee shall hold in
confidence all trade secret and proprietary information received from the
Company until such information is available to the public generally or to the
Company's competitors through no unauthorized act or fault of Employee. Upon
termination of this Agreement, Employee shall promptly return any written
proprietary information in his or her possession to the Company.
(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Employee or
observed by Employee. It does not include:
(i) Information, which at the time of disclosure, had been
previously published.
(ii) Information which is published after disclosure, unless such
publication is a breach of this Agreement or is otherwise a violation of the
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Employee; or
(iii) Information which, subsequent to disclosure, is obtained by
Employee from a third person who is lawfully in possession of such information
(which information is not acquired in violation of any contractual, legal, or
fiduciary obligation owed to the Company with respect to such information, and
is known by
10
Employee) and does not require Employee to refrain from disclosing such
information to others.
(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Employee in perpetuity.
13. INVENTIONS AND INNOVATIONS.
--------------------------
(a) As used in this Agreement, inventions and innovations mean new
ideas and improvements, whether or not patentable, relating to the design,
manufacture, use or marketing of golf equipment or other products of the
Company. This includes, but is not limited to, products, processes, methods of
manufacture, distribution and management, sources of and uses for materials,
apparatus, plans, systems and computer programs.
(b) Employee agrees to disclose to the Chief Executive Officer and the
Board of Directors of the Company any invention or innovation which he or she
develops, either alone or with anyone else, during the term of Employee's
employment with the Company, as well as any invention or innovation based on
proprietary information of the Company which Employee develops, whether alone or
with anyone else, within twelve (12) months after the termination of Employee's
employment with the Company.
(c) Employee agrees to assign any invention or innovation to the
Company:
(i) which is developed totally or partially while Employee is
employed by the Company;
(ii) for which Employee used any of the Company's equipment,
supplies, facilities or proprietary information, even if any or all of such
items are relatively minor, and have little or no monetary value; or
(iii) which results in any way from Employee's work for the
Company or relates in any way to the Company's business or the Company's current
or anticipated research and development.
(d) Employee understands and agrees that the existence of any
condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Employee to assign his or her inventions or innovations to the Company.
(e) All provisions of this Agreement relating to the assignment by
Employee of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872.
11
(f) Employee agrees that any invention or innovation which is required
under the provisions of this Agreement to be assigned to the Company shall be
the sole and exclusive property of the Company. Upon the Company's request, at
no expense to Employee, Employee shall execute any and all proper applications
for patents, assignments to the Company, and all other applicable documents, and
will give testimony when and where requested to perfect the title and/or patents
(both within and without the United States) in all inventions or innovations
belonging to the Company.
(g) Employee shall disclose all inventions and innovations to the
Company, even if Employee does not believe that he or she is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his or
her interest in such invention or innovation to the Company. If the Company and
Employee disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Employee to
prove that it is not included.
14. ASSIGNMENT. This Agreement shall be binding upon and shall inure
----------
to the benefit of the parties hereto and the successors and assigns of the
Company. Employee shall have no right to assign his rights, benefits, duties,
obligations or other interests in this Agreement, it being understood that this
Agreement is personal to Employee.
15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees incurred in such action or proceeding, in addition to any relief
to which such party may be deemed entitled, if, and only if, the arbitrator
finds that the non-prevailing party's position, taken as a whole, was frivolous
or baseless. The prevailing party in any such proceeding shall be entitled to
recover from the other party the reasonable costs and expenses of any such
proceeding (not including attorneys' fees).
16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Employee or the Company not herein contained.
This Agreement shall not be modified, amended or terminated except by another
instrument in writing executed by the parties hereto. This Agreement replaces
and supersedes any and all prior understandings or agreements between Employee
and the Company regarding employment.
17. NOTICES. Any notice, request, demand, or other communication
-------
required or permitted hereunder, shall be deemed properly given when actually
received or within five (5) days of mailing by certified or registered mail,
postage prepaid, to:
12
Employee: Charles Yash
P. O. Box 2621
Rancho Santa Fe, CA 92067
Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye
or to such other address as Employee or the Company may from time to time
furnish, in writing, to the other.
18. ARBITRATION. Any dispute, controversy or claim arising hereunder
-----------
or in any way related to this Agreement, its interpretation, enforceability, or
applicability, or relating to Employee's employment, or the termination thereof,
that cannot be resolved by mutual agreement of the parties shall be submitted to
arbitration. The arbitration shall be conducted by a retired judge from the
Judicial Arbitration and Mediation Service/Endispute ("JAMS") office located in
Orange County, California, who shall have the powers to hear motions, control
discovery, conduct hearings and otherwise do all that is necessary to resolve
the matter. The arbitration award shall be final and binding, and judgment on
the award may be entered in any court having jurisdiction thereof. It is
expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.
19. MISCELLANEOUS.
-------------
(a) Headings. The headings of the several sections and paragraphs of
--------
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.
(c) Applicable Law. This Agreement shall constitute a contract
--------------
13
under the internal laws of the State of California and shall be governed and
construed in accordance with the laws of said state as to both interpretation
and performance.
(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.
20. TRADE SECRETS OF OTHERS
-----------------------
It is the understanding of both the Company and Employee that Employee
shall not divulge to the Company any confidential information or trade secrets
belonging to others, including Employee's former employers, nor shall the
Company seek to elicit from Employee any such information. Consistent with the
foregoing, Employee shall not provide to the Company, and the Company shall not
request, any documents or copies of documents containing such information.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective the date first written above.
EMPLOYEE: COMPANY:
CALLAWAY GOLF COMPANY,
a California corporation
/s/CHARLES YASH By: /s/ELY CALLAWAY
- ------------------------- ---------------------------------
Charles Yash Ely Callaway, Chairman and CEO
By: /s/DONALD H. DYE
----------------
Donald H. Dye, President and COO
14
EXHIBIT A
A "Change in Control" means the following and shall be deemed to occur if
any of the following events occurs:
(a) Any person, entity or group, within the meaning of Section 13(d) or
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding
the Company and its subsidiaries and any employee benefit or stock ownership
plan of the Company or its subsidiaries and also excluding an underwriter or
underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof (such person, entity or group being
referred to herein as a "Person") becomes the beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or
(c) Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(i) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto (or,
in the case of a reorganization or merger or consolidation that is preceded or
accomplished by an acquisition or series of related acquisitions by any Person,
by tender or exchange offer or otherwise, of voting securities representing 5%
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such series of
acquisitions) continuing to represent, either by remaining outstanding or by
being converted into voting securities of another entity,
15
more than 50% of the combined voting power of the voting securities of the
Company or such other entity outstanding immediately after such reorganization
or merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
(d) Approval by the shareholders of the Company or an order by a court of
competent jurisdiction of a plan of liquidation of the Company.
16
EXHIBIT 10.15
CALLAWAY GOLF COMPANY
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
(As Amended and Restated April 17, 1996)
ARTICLE I
GENERAL
1. Adoption. This Callaway Golf Company Non-Employee Directors Stock
Option Plan (the "Plan") is effective as of September 1, 1992, subject to
approval by the Board of Directors and shareholders of Callaway Golf Company
(the "Company").
2. Purpose. The Plan is designed to promote the interests of the
Company and its shareholders by using investment interests in the Company to
attract and retain highly qualified independent directors.
3. Administration. The Plan shall be administered by the Company,
which shall have the power to construe the Plan, to determine all questions
arising under the Plan, to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable, and otherwise to carry out
the terms of the Plan. The interpretation and construction by the administrator
of any provisions of the Plan or of any option granted under the Plan shall be
final. Notwithstanding the foregoing, the administrator shall have no authority
or discretion as to the selection of persons eligible to receive options granted
under the Plan, the number of shares covered by options granted under the Plan,
the timing of such grants, or the exercise price of options granted under the
Plan, which matters are specifically governed by the provisions of the Plan.
4. Eligible Directors. A person shall be eligible to receive grants
of options under this Plan (an "Eligible Director") if, at the time of the
option's grant, he or she is a duly elected or appointed member of the Company's
Board of Directors, but is not then otherwise an employee of the Company or any
of its subsidiaries or affiliates and has not been an employee of the Company or
any of its subsidiaries or affiliates since the beginning of the Company's
preceding fiscal year.
5. Shares of Common Stock Subject to the Plan and Grant Limit. The
shares that may be issued upon exercise of options granted under the Plan shall
be authorized and unissued shares of the Company's Common Stock. The aggregate
number of shares that may be issued upon exercise of options granted under the
Plan shall not exceed 840,000 shares of Common Stock, subject to adjustment in
accordance with Article III, and no individual may
receive options under the Plan to purchase more than 120,000 shares of the
Company's Common Stock, subject to adjustment in accordance with Article III.
6. Amendment of the Plan. The Company's Board of Directors may,
insofar as permitted by law, from time to time suspend or discontinue the Plan
or revise or amend it in any respect whatsoever, except that no such amendment
shall alter or impair or diminish any rights or obligations under any option
theretofore granted under the Plan without the consent of the person to whom
such option was granted. In addition, without further shareholder approval, the
Plan may not be amended so as to increase the number of shares subject to the
Plan (as adjusted under Article III), increase the number of shares for which an
option or options may be granted to any optionee (as adjusted under Article
III), change the class of persons eligible to receive options under the Plan,
provide for the grant of options having an exercise price per option share less
than the exercise price specified in the Plan, or extend the final date upon
which options may be granted under the Plan. Under no circumstances may the
provisions of the Plan that provide for the amounts, price, and timing of option
grants be amended more than once every six months, other than to comport with
changes in the Internal Revenue Code, ERISA, or the rules thereunder.
7. Term of Plan. Options may be granted under the Plan until
September 1, 2002, whereupon the Plan will terminate. Notwithstanding the
foregoing, each option granted under the Plan shall remain in effect until such
option has been exercised or terminated in accordance with its terms and the
terms of the Plan.
8. Grants Before Shareholder Approval. Option grants made before
this Plan has been approved by the Company's shareholders shall be made subject
to and effective only upon such approval.
9. Restrictions. All options granted under the Plan shall be subject
to the requirement that, if at any time the Company shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to options granted under the Plan upon any securities exchange or under
any state or federal law, or the consent or approval of any government
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such an option or the issuance, if any, or purchase of
shares in connection therewith, such option may not be exercised in whole or in
part unless such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Company.
10. Nonassignability. No option granted under the Plan shall be
assignable or transferable by the grantee except by will or by the laws of
2
descent and distribution or pursuant to a qualified domestic relations order (as
defined by the Internal Revenue Code of 1986, as amended). During the lifetime
of the optionee, the option shall be exercisable only by the optionee, and no
other person shall acquire any rights therein.
11. Withholding Taxes. Whenever shares of Common Stock are to be
issued upon exercise of an option granted under the Plan, the administrator
shall have the right to require the optionee to remit to the Company an amount
sufficient to satisfy any federal, state and local withholding tax requirements
prior to the delivery of any certificate or certificates for such shares. The
administrator may, in the exercise of its discretion, allow satisfaction of tax
withholding requirements by accepting delivery of stock of the Company or by
withholding a portion of the Common Stock otherwise issuable upon exercise of an
option.
12. Definition of "Fair Market Value." For purposes of the Plan, the
term "fair market value," when used in reference to the value of a share of the
Company's Common Stock on the date an option is granted under the Plan, shall
be: (a) if the Common Stock is listed on an established stock exchange or
exchanges, the mean between the highest and lowest sale prices of the Common
Stock quoted in the Transactions Index of each such exchange as averaged with
such mean price as reported on any and all other exchanges, as published in "The
Wall Street Journal" and determined by the Company, or, if no sale price was
quoted in any such Index for such date, then as of the next preceding date on
which such a sale price was quoted, provided that the mean on such preceding
date is not less than 100% of the fair market value of the Common Stock on the
date the option is granted; or, (b) if the Common Stock is not then listed on an
exchange, the average of the closing bid and asked prices per share for the
Common Stock in the over-the-counter market as quoted on NASDAQ on such date;
or, (c) if the Common Stock is not then listed on an exchange or quoted on
NASDAQ, an amount determined in good faith by the Company.
13. Rights as a Shareholder. An optionee or a transferee of an
option shall have no rights as a shareholder with respect to any shares issuable
or issued upon exercise of the option until the date of the receipt by the
Company of all amounts payable in connection with exercise of the option,
including the exercise price and any amounts required by the Company pursuant to
Section 11 of Article I.
14. Purchase for Investment. Unless the shares of Common Stock to be
issued upon exercise of an option granted under the Plan have been effectively
registered under the Securities Act of 1933 as now in force or
3
hereafter amended, the Company shall be under no obligation to issue any shares
of Common Stock covered by any option unless the person who exercises such
option, in whole or in part, shall give a written representation and undertaking
to the Company which is satisfactory in form and scope to counsel to the Company
and upon which, in the opinion of such counsel, the Company may reasonably rely,
that he or she is acquiring the shares of Common Stock issued to him or her
pursuant to such exercise of the option for his or her own account as an
investment and not with a view to, or for sale in connection with, the
distribution of any such shares of Common Stock, and that he or she will make no
transfer of the same except in compliance with any rules and regulations in
force at the time of such transfer under the Securities Act of 1933, or any
other applicable law, and that if shares of Common Stock are issued without such
registration, a legend to this effect may be endorsed upon the securities so
issued.
ARTICLE II
STOCK OPTIONS
1. Grants of Initial Options.
(a) Each Eligible Director who becomes an Eligible Director in 1992
shall, upon first becoming an Eligible Director, receive a one-time grant of an
option to purchase up to 80,000 shares of the Company's Common Stock at an
exercise price of $2.50 per share, subject to (i) vesting as set forth in
Section 4 of Article II, and (ii) adjustment as set forth in Article III.
(b) Each Eligible Director who becomes an Eligible Director from
January 1, 1993 through April 17, 1996 shall, upon first becoming an Eligible
Director, receive a one-time grant of an option to purchase up to 80,000 shares
of the Company's Common Stock at an exercise price per share equal to 75% of the
fair market value of the Company's Common Stock on the date of his or her
election to the Board, subject to (i) vesting as set forth in Section 4 of
Article II, and (ii) adjustment as set forth in Article III.
(c) Each Eligible Director who becomes an Eligible Director after
April 17, 1996 shall, upon first becoming an Eligible Director, receive a one-
time grant of an option to purchase up to 80,000 shares of the Company's Common
Stock at an exercise price per share equal to the fair market value of the
Company's Common Stock on the date of his or her election to the Board, subject
to (i) vesting as set forth in Section 4 of Article II, and (ii) adjustment as
set forth in Article III.
4
(d) Options granted under Sections 1(a), 1(b) and 1(c) of this
Article II are "Initial Options" for purposes hereof.
2. Grants of Additional Options. On each even-numbered (i.e. 2nd,
4th, 6th, 8th, 10th) anniversary of an Eligible Director's election to the
Board, if the Eligible Director has served as a director since his or her
election and is continuing as a director for at least another year, such
Eligible Director shall automatically be granted an "Additional Option" to
purchase up to 8,000 shares of the Company's Common Stock at an exercise price
equal to the fair market value of the Company's Common Stock on the date of
grant, subject to (i) vesting as set forth in Section 4 of Article II, and (ii)
adjustment as set forth in Article III. No individual may receive Additional
Options to purchase more than 40,000 shares of the Company's Common Stock
pursuant to this subsection.
3. Exercise Price. The option exercise price shall be payable upon
the exercise of an option in legal tender of the United States or such other
consideration as the administrator may deem acceptable, including without
limitation stock of the Company (delivered by or on behalf of the person
exercising the option or retained by the Company from the Common Stock otherwise
issuable upon exercise), provided, however, that the administrator may, in the
exercise of its discretion, (i) allow exercise of an option in a broker-assisted
or similar transaction in which the exercise price is not received by the
Company until immediately after exercise, and/or (ii) allow the Company to loan
the exercise price to the person entitled to exercise the option, if the
exercise will be followed by an immediate sale of some or all of the underlying
shares and a portion of the sales proceeds is dedicated to full payment of the
exercise price. Upon proper exercise, the Company shall deliver to the person
entitled to exercise the option or his or her designee a certificate or
certificates for the shares of Common Stock to which the option pertains.
4. Vesting and Exercise. Initial Options and Additional Options
shall vest and become exercisable 50% upon the first anniversary of the grant
date, if the optionee has remained an Eligible Director for the entire period
from the date of grant to the first anniversary thereof, and 50% upon the second
anniversary of the grant date, if the optionee has remained an Eligible Director
for the entire period from the date of grant to the second anniversary thereof.
5. Option Agreements. Each option granted under the Plan shall be
evidenced by an option agreement duly executed on behalf of the Company and by
the Eligible Director to whom such option is granted and stating the number of
shares of Common Stock issuable upon exercise of the option, the exercise price,
the time during which the option is exercisable, and the times at which the
options vest and become exercisable. Such option agreements
5
may but need not be identical and shall comply with and be subject to the terms
and conditions of the Plan, a copy of which shall be provided to each option
recipient and incorporated by reference into each option agreement. Each option
agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the administrator.
6. Term of Options and Effect of Termination. Notwithstanding any
other provision of the Plan, no Initial Options or Additional Options shall be
exercisable after the expiration of five years from the effective date of their
grant. In the event that any outstanding option under the Plan expires by
reason of lapse of time or is otherwise terminated without exercise for any
reason, then the shares of Common Stock subject to any such option which have
not been issued pursuant to the exercise of the option shall again become
available in the pool of shares of Common Stock for which options may be granted
under the Plan. In the event that the holder of any option granted under this
Plan shall cease to be a director of the Company for any reason, all options
granted under this Plan to such holder shall be exercisable, to the extent
already exercisable at the date such holder ceases to be a director, for a
period of 180 days after that date (or, if sooner, until the expiration of the
option according to its terms), and shall then terminate. In the event of the
death of an optionee while such optionee is a director of the Company or within
the period after termination of such status during which he or she is permitted
to exercise an option, such option may be exercised by any person or persons
designated by the optionee on a Beneficiary Designation Form adopted by the
administrator for such purpose or, if there is no effective Beneficiary
Designation Form on file with the Company, by the executors or administrators of
the optionee's estate or by any person or persons who shall have acquired the
option directly from the optionee by his or her will or the applicable laws of
descent and distribution.
ARTICLE III
RECAPITALIZATIONS AND REORGANIZATIONS
1. Anti-dilution Adjustments. The number of shares of Common Stock
available for issuance upon exercise of options granted under the Plan, the
maximum number of shares for which options granted under the Plan may be
exercised by any individual, the number of shares for which each option (issued
and unissued) can be exercised, and the exercise price per share of options
(issued and unissued) shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock
resulting from a subdivision or consolidation of shares or the payment of a
stock dividend or any other increase or decrease in the number of issued and
outstanding shares of Common Stock effected without receipt of consideration by
the Company. All share amounts and exercise prices set forth in this
6
amended plan document have been restated to take into account, and give full
effect to, any and all stock splits implemented since the adoption and approval
of the Plan by shareholders on April 29, 1993 and before April 17, 1996.
2. Corporate Transactions. If the Company shall be the surviving
corporation in any merger or consolidation, each outstanding option shall
pertain to and apply to the securities to which a holder of the same number of
shares of Common Stock that are subject to that option would have been entitled.
A dissolution or liquidation or change in control of the Company, or a merger or
consolidation in which the Company is not the surviving corporation, shall cause
each outstanding option to terminate, unless the agreement of merger or
consolidation shall otherwise provide; provided that, in the event such
dissolution, liquidation, change in control, merger or consolidation will cause
outstanding options to terminate, each optionee shall have the right immediately
prior to such dissolution, liquidation, merger or consolidation or upon such
change in control to exercise his or her option or options in whole or in part
without regard to any vesting requirements. For purposes hereof, a "change in
control" shall be the acquisition by any person or entity of beneficial
ownership of 50% or more of the Company's outstanding voting securities.
3. Determination by the Company. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the administrator, whose determination in that respect shall be
final, binding and conclusive. The grant of an option pursuant to the Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all of any part of its business or assets.
7
EXHIBIT 11.1
CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
Three months ended June 30, Six months ended June 30,
--------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands, except per share data)
Primary earnings per share computation:
- ---------------------------------------
Net income $38,937 $27,329 $58,392 $44,234
======= ======= ======= =======
Weighted average shares outstanding 66,657 67,132 66,369 67,943
Dilutive options 3,847 2,942 3,680 3,274
------- ------- ------- -------
Common equivalent shares 70,504 70,074 70,049 71,217
======= ======= ======= =======
Primary earnings per share:
Net income $ .55 $ .39 $ .83 $ .62
======= ======= ======= =======
Fully diluted earnings per share computation:
- ---------------------------------------------
Net income $38,937 $27,329 $58,392 $44,234
======= ======= ======= =======
Weighted average shares outstanding 66,657 67,132 66,369 67,943
Dilutive options 4,146 3,136 4,050 3,372
------- ------- ------- -------
Common equivalent shares 70,803 70,268 70,419 71,315
======= ======= ======= =======
Fully diluted earnings per share:
Net income $ .55 $ .39 $ .83 $ .62
======= ======= ======= =======
5
1,000
6-MOS
DEC-31-1995
JAN-01-1996
JUN-30-1996
105,854
0
95,259
6,390
81,833
300,222
102,615
27,437
395,696
98,366
0
0
0
722
293,620
395,696
345,140
345,140
165,425
165,425
0
0
0
93,527
35,135
58,392
0
0
0
58,392
0.83
0.83
