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