UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Common Stock, $.01 par
value, as of April 30, 1996 was 71,890,202.
CALLAWAY GOLF COMPANY
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Condensed Balance Sheet at March 31, 1996
and December 31, 1995 3
Consolidated Condensed Statement of Income for the three months
ended March 31, 1996 and 1995 4
Consolidated Condensed Statement of Cash Flows for the three
months ended March 31, 1996 and 1995 5
Consolidated Condensed Statement of Shareholders' Equity for
the three months ended March 31, 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 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
March 31, December 31,
1996 1995
---------------------- ----------------------
(Unaudited)
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 63,396 $ 59,157
Accounts receivable $ 91,240 $ 80,316
Less allowance for doubtful accounts 6,387 6,410
--------- ---------
Net accounts receivable 84,853 73,906
Inventories 72,021 56,380
Less reserve for obsolescence 4,690 4,796
--------- ---------
Net inventories 67,331 51,584
Deferred taxes 23,377 22,688
Other current assets 2,897 2,370
--------- ---------
Total current assets 241,854 209,705
Property and equipment, net 72,185 69,034
Other assets 12,567 11,236
--------- ---------
$ 326,606 $ 289,975
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 25,530 $ 26,894
Accrued employee compensation and benefits 11,826 10,680
Accrued warranty expense 25,119 23,769
Income taxes payable 9,470 1,491
--------- ---------
Total current liabilities 71,945 62,834
Long-term liabilities 2,428 2,207
Commitments (Note 10)
Shareholders' equity:
Common Stock, $.01 par value 240,000,000 shares
authorized, 71,752,102 and 70,912,129 issued and
outstanding at March 31, 1996 and
December 31, 1995, respectively 718 709
Paid-in capital 248,352 214,846
Unearned compensation (2,169) (2,420)
Retained earnings 147,107 131,712
Less: Grantor Stock Trust (5,300,000 shares)
at market (Note 9) (141,775) (119,913)
--------- ---------
Total shareholders' equity 252,233 224,934
--------- ---------
$ 326,606 $ 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
-------------------------------------------
March 31, March 31,
1996 1995
--------------------- -------------------
Net sales $135,138 100% $119,025 100%
Cost of goods sold 66,506 49% 58,549 49%
-------- --------
Gross profit 68,632 51% 60,476 51%
Selling expenses 18,145 13% 19,613 16%
General and administrative expenses 17,191 13% 11,621 10%
Research and development costs 3,162 2% 1,999 2%
-------- --------
Income from operations 30,134 22% 27,243 23%
Other income, net 863 681
-------- --------
Income before income taxes 30,997 23% 27,924 23%
Provision for income taxes 11,542 11,020
-------- --------
Net income $ 19,455 14% $ 16,904 14%
======== ========
Earnings per common share $.28 $.23
Common equivalent shares 69,595 72,370
Dividends paid per share $.06 $.05
======== ========
See accompanying notes to consolidated condensed financial statements.
4
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended
--------------------------------
March 31, March 31,
1996 1995
-------------- --------------
Cash flows from operating activities:
Net income $ 19,455 $ 16,904
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,939 2,682
Loss on disposal of fixed assets 11 0
Non-cash compensation 1,778 452
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (11,017) (15,435)
Inventories, net (15,794) (4,154)
Deferred taxes (924) 3,156
Other assets (1,627) (306)
Accounts payable and accrued expenses (1,339) (759)
Accrued employee compensation
and benefits 1,147 4,891
Accrued warranty expense 1,350 1,468
Income taxes payable 8,003 427
Other liabilities 221 49
-------- --------
Net cash provided by operating activities 4,203 9,375
-------- --------
Cash flows from investing activities:
Capital expenditures (6,104) (2,508)
-------- --------
Net cash used in investing activities (6,104) (2,508)
-------- --------
Cash flows from financing activities:
Issuance of Common Stock 5,942 2,174
Tax benefit from exercise of stock options 4,184 4,416
Dividends paid, net (3,964) (3,444)
Retirement of Common Stock 0 (2,000)
-------- --------
Net cash provided by financing activities 6,162 1,146
-------- --------
Effect of exchange rate changes on cash (22) 40
-------- --------
Net increase in cash and cash equivalents 4,239 8,053
Cash and cash equivalents at beginning of period 59,157 54,356
-------- --------
Cash and cash equivalents at end of period $ 63,396 $ 62,409
======== ========
Non-cash financing activities:
Accrued liability for repurchase and retirement
of Common Stock $ 10,006
========
See accompanying notes to consolidated condensed financial statements.
5
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
Common Stock Paid-in Unearned Retained
Shares 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 741 8 5,934 5,942
Tax benefit from exercise of
stock options 4,184 4,184
Compensatory stock options 237 251 488
Compensatory stock 99 1 1,289 1,290
Cash dividends (4,282) (4,282)
Dividends on shares held by GST 318 318
Equity adjustment from foreign
currency translation (96) (96)
Adjustment of GST shares to
market value 21,862 (21,862)
Net income 19,455 19,455
------ ---- -------- ------------ -------- --------- --------
Balance, March 31, 1996 71,752 $718 $248,352 $(2,169) $147,107 $(141,775) $252,233
====== ==== ======== ============ ======== ========= ========
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 March 31, 1996 and
the consolidated condensed statements of income, cash flows and shareholders'
equity for the three month periods ended March 31, 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
and Callaway Golf (UK) Limited. 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 March 31, 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 March 31, 1996 and December 31, 1995 consisted of:
March 31, December 31,
1996 1995
----------- -------------
(Unaudited)
(in thousands)
Inventories:
Raw materials $36,780 $23,980
Work-in-process 1,818 1,109
Finished goods 33,423 31,291
------- -------
72,021 56,380
Less reserve for obsolescence (4,690) (4,796)
------- -------
Net inventories $67,331 $51,584
======= =======
7
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 5
The provision for income taxes is as follows:
Three months ended Three months ended
March 31, 1996 March 31, 1995
------------------- -------------------
(Unaudited) (Unaudited)
(in thousands)
Current tax provision:
Federal $10,339 $ 5,867
State 2,161 1,651
Foreign (53) 331
Deferred tax (benefit) expense:
Federal (720) 2,449
State (207) 784
Foreign 22 (62)
------- -------
$11,542 $11,020
======= =======
Deferred tax assets are comprised of the following:
March 31, December 31,
1996 1995
---------- ------------
(Unaudited)
(in thousands)
Reserves and allowances $15,789 $16,381
Depreciation and amortization 4,494 4,297
Effect of inventory overhead adjustment 2,179 1,414
Deferred compensation 2,021 2,019
Compensatory stock options and rights 1,313 1,346
State taxes, net 789 972
Other 1,373 605
------- -------
Net deferred tax assets $27,958 $27,034
======= =======
8
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 6
On February 27, 1996, the Company paid a quarterly dividend of $.06 per share to
shareholders of record on February 6, 1996. Additionally, on April 17, 1996,
the Company declared a quarterly dividend of $.06 per share payable May 21, 1996
to shareholders of record on April 30, 1996.
Note 7
During the three months ended March 31, 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 March 31, 1996, the Company had approximately
$4,240,000 of foreign exchange contracts outstanding. The contracts mature
between April and July of 1996. Realized and unrealized gains and losses on
these contracts are recorded in net income. The net realized and unrealized
gains from foreign exchange contracts for the three months ended March 31, 1996
totaled approximately $24,000.
Note 8
At March 31, 1996, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $39.7 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 March 31, 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 net impact on
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
9
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
of its golf clubs, whichever is greater, through December 31, 1997, and 25% of
all graphite shaft requirements from January 1998 through May 1998.
In April 1996, the Company entered into an agreement with one of its suppliers
to purchase, under certain conditions, titanium clubheads costing up to a
maximum of $78,000,000 for the remainder of 1996 through December 1997.
Effective June 1995, the Company formed a joint venture with Sturm, Ruger &
Company, Inc. (Sturm, Ruger), its main supplier of Great Big Bertha(TM) titanium
heads, to construct a foundry that would significantly increase Sturm, Ruger's
capacity to supply the Company's requirements. Under the terms of the joint
venture agreement, the Company has a 50% equity interest in and is required to
contribute up to $7,000,000 in capital contributions for developing, designing,
equipping and operating the new foundry. Once operational, the Company will
commit to purchasing, at competitive prices, club heads costing approximately
$150,000,000 during the period from 1996 through 1998. The Company accounts for
its investment in the joint venture pursuant to the equity method. As of March
31, 1996, the Company had made capital contributions of $2,476,000 to the joint
venture, which had not commenced operations.
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.
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 MARCH 31, 1996 AND 1995:
Net sales increased 14% to $135.1 million for the three months ended March 31,
1996 compared to $119.0 million for the same period in the prior year. This
increase was primarily attributable to increased sales of Great Big Bertha(TM)
Drivers and the introduction of Great Big Bertha(TM) Fairway Woods in January
1996, for which shipments in limited quantities began in March 1996. These
sales increases were offset by a decrease in net sales of Big Bertha(R) War
Bird(R) Metal Woods. Big Bertha(R) Iron sales remained relatively flat as
compared to the same period in the prior year.
For the three months ended March 31, 1996, gross profit increased to $68.6
million from $60.5 million for the same period in the prior year, and gross
margin remained constant at 51%.
Selling expenses decreased to $18.1 million in the first quarter of 1996
compared to $19.6 million in the first quarter of 1995. As a percentage of net
sales, selling expenses in the first quarter of 1996 decreased to 13% from 16%
for the same period in 1995. The $1.5 million decrease was primarily a result
of a reduction in sales representatives' salaries and commission expense due to
a new compensation package under which their compensation is earned more evenly
throughout the year. These decreases were partially offset by increases in
advertising and tour endorsement expenses.
General and administrative expenses for the three months ended March 31, 1996
increased to $17.2 million from the $11.6 million incurred during the first
quarter of 1995. As a percentage of net sales, general and administrative
expenses increased to 13% for the first quarter of 1996 from 10% for the same
period in 1995. The $5.6 million increase in general and administrative
expenses was primarily attributable to costs associated with the ongoing
implementation process of a new computer system, costs associated with the
Company's business development initiatives, and an increase in charitable
contribution costs.
Research and development expenses were $3.2 million for the three months ended
March 31, 1996 as compared to $2.0 million for the same period in the prior
year. The increase in research and development costs was attributable to
increased staff and operational expenses associated with the Company's golf club
testing facility and shaft development department.
CERTAIN FACTORS AFFECTING THE GOLF CLUB INDUSTRY AND CALLAWAY GOLF
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. The Company also believes that the sales of all
golf clubs in Japan, the world's second largest consumer of golf clubs next to
the United States, has been declining during this same period, but should
stabilize during 1996. Demand for the Company's Big Bertha(R) Metal Woods with
the War Bird(R) soleplate and Big Bertha(R) Irons, which were both announced in
January 1994, and for Great Big Bertha(TM) Titanium Drivers, which were
announced in late 1994, was strong throughout these periods. However, no
11
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(TM)
Drivers in March 1995, and began shipping Great Big Bertha(TM) Fairway Woods in
March of 1996. This product line is an important part of the Company's
business. Great Big Bertha(TM) Metal Woods have a titanium club head and are
priced substantially higher than the Company's stainless steel product line. The
Company has three sources for its titanium club heads but is currently receiving
the vast majority of its club heads from two vendors with only limited
quantities from the third source. 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 metal wood
sales.
The Company believes that the introduction of new, innovative golf clubs will
be important to its future success. New models and basic design changes are
frequently introduced into the golf club 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 clubs 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. Although 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.
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 in the past has
maintained a "safety stock" of product to cover potential interruption of
deliveries, when possible. The Company assessed the risk and determined that
the level of "safety stock" or days sales in inventory could be reduced. As a
result, during 1995, the Company reduced the level of on-hand inventory. By
reducing inventory, the Company has reduced its ability to ameliorate the
adverse impact of a disruption of component supply should one occur.
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
12
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 our
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. For example, the Company obtained a license in 1994 from
Cleveland Golf Company covering the adhesive process used to attach the
Company's trademarked medallions to its Big Bertha(R) Irons. Additionally, the
Company has a license through 1996 to use the name Ruger(R) on its titanium
metal woods. There is no assurance that the license will be renewed at the end
of 1996. 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 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, cash and cash equivalents increased to $63.4 million from
$59.2 million at December 31, 1995, due to $6.2 million provided by financing
activities primarily related to $5.9 million in stock option exercises, combined
with $4.2 million provided by operations. These increases were offset by $6.1
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 $84.9 million at March 31,
1996 from $73.9 million at December 31, 1995 and $45.6 million at March 31,
1995, primarily as a result of the increase in net sales. Net inventory was
$67.3 million at March 31, 1996 compared to $51.6 million at December 31, 1995
and $78.5 million at March 31, 1995. The increase in inventory levels at March
31, 1996 is consistent with historical seasonality trends. Higher component
costs related to the Great Big Bertha(TM) product line also contributed to the
increase in inventory.
13
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.
The Company is involved in certain legal matters generally incidental
to its normal business activities. While the outcome of any such matters cannot
be accurately predicted, the Company does not believe the ultimate resolution of
any such existing matters should have a material adverse effect on its financial
position or results of operations.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
10.21 Standard Net Industrial Lease by and between National Life
Insurance Company and Callaway Golf Company dated March
13, 1996 for 5858 Dryden Place, Carlsbad, California.
11.1 Statement re: Computation of Earnings Per Common Share
27 Financial Data Schedule
b. Reports on Form 8-K:
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: May 13, 1996 /s/ Donald H. Dye
---------------------------------------
DONALD H. DYE
Chief Executive Officer
President
Chief Operating Officer
/s/ David A. Rane
---------------------------------------
DAVID A. RANE
Executive Vice President
Chief Financial Officer
15