SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITUES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
Preferred Share Purchase Rights
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 26, 1997, the aggregate market value of the Registrant's
Common Stock held by nonaffiliates of the Registrant was $2,121,298,000 based on
the closing sales price of the Registrant's Common Stock as reported in the
consolidated transactions reporting system.
As of March 26, 1997, the number of shares of the Registrant's Common
Stock outstanding was 73,690,775, and there were no shares of the Registrant's
Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I, II and IV incorporate certain information by reference from
Registrant's Annual Report to shareholders for the fiscal year ended December
31, 1996.
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for the annual meeting of shareholders
to be held on April 17, 1997 which proxy statement was filed on March 10, 1997.
Note: When used in this Annual Report on Form 10-K and the information
incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s),
"will," "may," "anticipate(s)," 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.
Callaway Golf 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
describe certain factors which affect the Company's business, including the
factors set forth in Item 1 of this Report and the discussion incorporated by
reference in Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the caption "Certain Factors
Affecting the Golf Club Industry and Callaway Golf," as well as the Company's
periodic reports on Forms 10-Q and 8-K filed with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS.
Callaway Golf Company (the "Company" or "Callaway Golf") designs,
develops, manufactures and markets high quality, innovative golf clubs. The
Company's golf clubs are sold at premium prices to both average and skilled
golfers on the basis of performance, ease of use and appearance. Callaway
Golf's primary products, all of which incorporate the Company's S2H2(R) design
concept, currently include the Biggest Big Bertha(TM) Titanium Driver, Great Big
Bertha(R) Titanium Driver and Fairway Woods, Big Bertha(R) Metal Woods, Great
Big Bertha(R) Tungsten.Titanium(TM) Irons, Big Bertha(R) Irons, Big Bertha
Gold(TM) Irons, Big Bertha(R) Tour Series Wedges and various putters, including
the Bobby Jones(R) Series Putters.
PRODUCTS
The following table sets forth the contribution to net sales
attributable to the product groups and for the periods indicated (dollars in
thousands).
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
Metal Woods $479,127 71% $382,740 69% $325,797 73%
Irons 168,576 25% 140,620 25% 98,913 22%
Putters, accessories
and other 30,809 4% 29,927 6% 24,019 5%
-------------------------------------------------
Net Sales $678,512 100% $553,287 100% $448,729 100%
=================================================
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 1997. Sales of all golf clubs in Japan, the
world's second largest consumer of golf clubs next to the United States,
appeared to be stabilizing during early 1996, but recent trends indicate the
market may be declining. Although demand for the Company's products has been
generally strong during the year ended December 31, 1996, 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.
METAL WOODS
Biggest Big Bertha(TM) Titanium Driver. In January 1997, the Company
introduced the Biggest Big Bertha(TM) Titanium Driver. The Biggest Big
Bertha(TM) Driver has a titanium clubhead which is approximately 15% larger than
the Great Big Bertha(R) Driver clubhead described below, and has a 46"
ultralight graphite shaft which is one inch longer than the Great Big Bertha(R)
Driver's shaft. Although larger and longer, the Biggest Big Bertha(TM) Driver is
lighter in overall weight than the Great Big Bertha(R) Driver. The Biggest Big
Bertha(TM) Driver incorporates the S2H2(R) design
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concept, the War Bird(R) soleplate (which features a deep dish on either side of
the central facet running from clubface to trailing edge) and an advanced
internal weighting system which increases the degree of perimeter weighting of
the titanium clubhead. The Company offers the Biggest Big Bertha(TM) Driver in
lofts ranging from 7 to 12 degrees. It is expected that this product line will
be offered as a driver only. Deliveries of significant quantities of this new
product commenced in January 1997.
Great Big Bertha(R) Titanium Metal Woods. The Company offers the Great
Big Bertha(R) Titanium Driver, which has a titanium clubhead and a lightweight
graphite shaft, in lofts ranging from 6.5 to 12 degrees. The head is 25% larger
and the overall weight is 10% lighter than the Big Bertha(R) War Bird(R) Driver.
The driver incorporates the S2H2(R) concept as well as the War Bird(R)
soleplate. Deliveries of significant quantities of this product commenced in
March 1995. In January 1996, the Company introduced Great Big Bertha(R) Fairway
Woods (numbers 2, 3, 4, 5, 7 and 9). These fairway woods have titanium clubheads
and also incorporate the S2H2(R) concept, the War Bird(R) soleplate and
lightweight graphite shafts. Deliveries of significant quantities of these new
products commenced in May 1996.
Big Bertha(R) Metal Woods with the War Bird(R) Soleplate. The Company
offers Big Bertha(R) War Bird(R) Drivers in lofts ranging from 8 to 12 degrees
with graphite, steel or titanium shafts. The Company also offers Big Bertha(R)
War Bird(R) Fairway Woods (numbers 2, 3, strong 3, 4, strong 4, 5,
HeavenWood(R), Divine Nine(R) and Ely Would(R)). The Company introduced the
Heaven Wood(R), Divine Nine(R) and Ely Would(R) metal woods in 1992, 1993 and
1995, respectively. All of these clubs incorporate the War Bird(R) soleplate. In
January 1996, the Company introduced new RCH series 96(TM) graphite shafts for
its Big Bertha(R) War Bird(R) Metal Woods. The new shafts are lighter and more
responsive. Delivery of this product commenced in February 1996.
IRONS
Big Bertha(R) Irons, Big Bertha Gold(TM) Irons, Big Bertha(R) Tour
Series Wedges and Big Bertha Gold(TM) Tour Series Wedges. The Company offers Big
Bertha(R) Irons 1 through 9, and pitching, approach, sand, and lob wedges, with
either graphite, steel or titanium shafts. In January 1996, the Company
introduced new and improved Big Bertha(R) Irons. These new Irons provide
improved weight distribution and have a lighter, more responsive graphite shaft
than the original Big Bertha(R) Irons. Delivery of this new product commenced in
February 1996. In September 1996, the Company introduced Big Bertha Gold(TM)
Irons, cast of aluminum bronze and including all of the design features of Big
Bertha(R) Irons. Designed to have a softer feel and richer look than Big
Bertha(R) Irons, deliveries of significant quantities of Big Bertha Gold(TM)
Irons commenced in October 1996. In September 1996, the Company also introduced
Big Bertha(R) Tour Series Wedges (pitching, approach, sand and lob wedges) with
several new features geared toward enhancing playability for middle-to low-
handicap amateurs as well as tour professionals. Deliveries of significant
quantities of these new products commenced in September 1996. In January 1997,
the Company also introduced Big Bertha Gold(TM) Tour Series Wedges. These
wedges, which are cast of aluminum bronze, are expected to be available in May
1997.
Great Big Bertha(R) Tungsten.Titanium(TM) Irons. In January 1997, the
Company introduced Great Big Bertha(R) Tungsten.Titanium(TM) Irons. The new
Great Big Bertha(R) Tungsten.Titanium(TM) Irons incorporate the same core design
features as Big Bertha(R) Irons, but have a slightly larger titanium clubhead
with a specially designed tungsten inset to concentrate weight low and deep in
the clubhead. These design features are intended to give these irons a lower and
deeper sweet-spot compared to other titanium irons. The Company offers Great Big
Bertha(R) Tungsten.Titanium(TM) Irons 1 through 9, and pitching, approach, sand
and lob wedges, with either graphite, steel or titanium shafts. Deliveries of
limited quantities of this new product are expected to commence in May 1997.
PUTTERS, ACCESSORIES AND OTHER
Putters. The Company has a line of steel and graphite shafted putters,
some of which incorporate the S2H2(R) concept, including the Tuttle(R) and the
Tuttle(R) II putters, the Big Bertha(R) War Bird(R) putter, and the steel
shafted Big Bertha(R) Blade putter. In September 1996, the Company introduced
and commenced deliveries of the new Bobby Jones(R) line of putters, consisting
of three styles of precision-machined putters with a double-radius bend, offset
shaft.
Accessories and Other. In addition to its golf clubs, Callaway Golf
offers golf-related equipment and supplies manufactured by other companies
bearing the Callaway(R) logo, including golf bags, travel bags, head covers,
hats, umbrellas and other accessories.
2
LICENSING
Through a licensing arrangement with Jonesheirs, Inc., Callaway Golf
obtained the exclusive, worldwide rights to the use of the Bobby Jones(R) name
for golf clubs and golf-related accessories through 2010. The Company receives a
royalty from the Hickey-Freeman Company on sales of Bobby Jones(R) Sportswear
and certain other products.
Callaway Golf also has an exclusive licensing agreement with Nordstrom,
Inc., under which Nordstrom, Inc. designs, produces and sells apparel at its own
expense under the "Callaway Golf Apparel by Nordstrom" label. The line includes
men's and women's golf apparel and footwear and is sold at Nordstrom stores
throughout the United States.
PRODUCT DESIGN AND DEVELOPMENT
Product design at Callaway Golf is a result of the integrated efforts of
its product development, manufacturing and sales departments, all of which work
together to generate new ideas for golf equipment. The Company has not limited
itself in its research efforts by trying to duplicate designs that are
traditional or conventional and believes it has created an environment in which
new ideas are valued and explored. The Company's research and development
expenses were $16.2 million, $8.6 million and $6.4 million during 1996, 1995,
and 1994, respectively. The Company intends to continue to invest substantial
amounts in its research and development activities in 1997 and beyond. In
addition to development of new golf equipment, these investments are expected to
include, among others, significant expenditures in support of Callaway Golf Ball
Company's efforts to develop and market a new golf ball product, as well as the
continued enhancement of, and the development of additional applications for,
the Company's Sir Isaac Performance System(TM), a high-tech evaluation system
which permits golfers to compare the performance of different golf clubs and
balls.
In January 1997, the Company announced agreements to establish the
"Callaway Golf Experience" centers at the Walt Disney World Resort in Buena
Vista, Florida and the Pebble Beach Resorts in Pebble Beach, California. The
Callaway Golf Experience Centers feature the Sir Isaac Performance System(TM), a
high-tech evaluation system which permits golfers to compare the performance of
different golf clubs and balls. In connection with these arrangements, the
Company also received certain exclusive promotional rights at these popular
resorts.
Callaway Golf has the ability to build and modify clubhead designs by
using computer aided design/computer aided manufacturing ("CAD/CAM") software
and complete numerical control ("CNC") milling equipment. CAD/CAM software
enables designers to develop computer models of new club designs. CNC milling
equipment converts the digital output from CAD/CAM computer models into physical
metal models produced by an electronically-controlled milling machine. Callaway
Golf uses this software and equipment to facilitate the rapid design and
production of physical models of clubheads, as well as casting tools for
producing prototype clubheads for testing. In 1996, the Company purchased two
induction furnaces (for casting ferrous and non-ferrous alloys) and one
cold-walled furnace (for casting titanium, nickel and cobalt alloys). The
Company is installing these furnaces in a state-of-the-art research facility at
the Company's headquarters in Carlsbad, California, which should enable it to
cast its own prototype clubheads on-site, as well as study new production
processes and techniques. The Company expects that this new development
facility will be operational in August 1997. The Company believes that this
on-site casting capability will further facilitate the rapid design and
development of prototype clubheads.
The Company believes that the introduction of new, innovative golf
equipment will be important to its future success. As a result, the Company
faces certain risks associated with such a strategy. For example, new models
and basic design changes in golf equipment are frequently met with consumer
rejection. In addition, prior successful designs may be rendered obsolete
within a relatively short period of time as new products are introduced into the
marketplace. New designs must satisfy the standards established by the United
States Golf Association ("USGA") and the Royal and Ancient Golf Club of St.
Andrews ("R&A") because these standards are generally followed by golfers
within their respective jurisdictions. There is no assurance that new designs
will receive USGA and/or R&A approval, or that existing USGA and/or R&A
standards will not be altered in ways that adversely affect the sales of the
Company's products. Moreover, the Company's new products have tended to
incorporate significant innovations in design and manufacture, which have
resulted in increasingly higher prices for the Company's products relative to
products already in the marketplace. There can be no assurance that a
significant percentage of the public will always be willing to pay such prices
for golf equipment. Thus, although the Company has achieved certain successes
in the
3
introduction of its golf clubs in the past, no assurances can be given that the
Company will be able to continue to design and manufacture golf clubs that
achieve market acceptance in the future.
In June 1996, the Company formed Callaway Golf Ball Company, a
wholly-owned subsidiary of the Company, for the purpose of designing,
manufacturing and selling golf balls. The Company has previously licensed the
manufacture and distribution of a golf ball product in Japan and Korea. The
Company also distributed a golf ball under the trademark "Bobby Jones". These
golf ball ventures were not commercially successful. At this time, it has not
been finally determined whether Callaway Golf Ball Company will enter the golf
ball business by developing a new product in a new plant to be constructed just
for this purpose; by acquiring an existing golf ball manufacturer; by
participating in a joint venture with another company; or by a combination of
these factors. This business is in the early stages of development. It is
expected, however, that it will have a negative impact on the Company's future
cash flow and income from operations for several years. The Company believes
that many of the same factors which affect the golf equipment industry,
including growth rate in the golf equipment industry, seasonality and new
product introduction, also apply to the golf ball business. There can be no
assurance if and when a successful golf ball product will be developed or that
the Company's investment will ultimately be realized.
SALES AND MARKETING
Sales for Distribution in the United States
Approximately 68%, 66% and 74% of the Company's net sales were derived
from sales for distribution within the United States in 1996, 1995 and 1994,
respectively. The Company targets those golf retailers (both on-course and off-
course) who sell "pro-line" clubs (professional quality golf clubs) and provide
a level of customer service appropriate for the sale of premium golf clubs. No
one customer that distributes golf clubs in the United States accounted for more
than 5% of the Company's revenues in 1996, 1995, and 1994. The Company
distributes its products in Hawaii through an exclusive distributor.
The Company employs 56 full-time regional field representatives, 16
in-house telephone salespersons and 19 customer service representatives. Each
geographic region is covered by both a field representative and a telephone
salesperson who work together to initiate and maintain relationships with
customers through frequent telephone calls and in-person visits. The Company
believes that this tandem approach of utilizing field representatives and
telephone salespersons provides the Company a competitive advantage over other
golf club manufacturers that distribute their golf clubs solely through
independent sales representatives rather than employees. Notwithstanding the
foregoing, Callaway Golf recognizes that other companies have marketing programs
which may be equally or more effective than its own strategy.
While the Company seeks to control the distribution of its products to
the extent permitted by law, it is still the case that quantities of the
Company's products find their way to unapproved outlets or distribution
channels. This "gray market" in the Company's products can undermine approved
retailers and distributors who promote and support the Company's products, and
can injure the Company's image in the minds of its customers and consumers. On
the other hand, stopping such commerce could result in an increase in sales
returns over historical levels, and/or a potential decrease in sales to those
customers who are selling Callaway Golf products to unauthorized distributors.
While the Company has taken some lawful steps to limit commerce in its products
in the "gray market" in both domestic and international markets, it has not been
successful in stopping such commerce to date.
Sales for Distribution Outside of the United States
Approximately 32%, 34% and 26% of the Company's net sales were derived
from sales for distribution outside of the United States in 1996, 1995 and 1994,
respectively. The majority of the Company's international sales are made
through distributors specializing in the sale and promotion of golf clubs in
specific countries or regions around the world. The Company currently has 21
distribution arrangements covering sales of the Company's products in over 40
foreign countries, including Japan, Canada, Singapore, Korea, Hong Kong,
Australia, France, Spain, Argentina and South Africa. Prices of golf clubs for
sales outside of the United States receive an export pricing discount to
compensate international distributors for selling, advertising and distribution
costs. A change in the Company's relationship with significant distributors
could negatively impact the volume of the Company's international sales.
4
The Company directly markets its products in the United Kingdom and
Sweden through its wholly-owned British subsidiary, Callaway Golf (UK) Limited.
In July 1996, the Company acquired a majority interest in its distributor in
Germany, Golf Trading GmbH, which sells and promotes the Company's products in
Germany, Austria, the Netherlands and Switzerland.
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The distribution agreement requires Sumitomo to purchase
specified minimum quantities. The current distribution agreement began in
February 1993 and has an initial term of seven years. The Company has been
engaged in discussions regarding a possible restructuring of the Company's
distribution arrangements with Sumitomo, which is intended to streamline the
distribution of the Company's products in Japan. There can be no assurance,
however, that such a restructuring will occur, or if consummated, that the
proposed restructuring will achieve its intended goals. It is possible that the
attempt to restructure the Company's distribution arrangements in Japan, or the
failure to succeed in that attempt, will adversely affect the Company's
business in Japan. Sales to Sumitomo represented approximately $58.2 million
(9%), $61.0 million (11%) and $45.9 million (10%) of the Company's net sales in
1996, 1995 and 1994, respectively. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Annual Report to shareholders for the
fiscal year ended December 31, 1996 ("1996 Annual Report to Shareholders").
During 1995, the Company began to evaluate growth opportunities in and
outside of the golf equipment industry. One of the opportunities identified by
the Company relates to the Company's acquisition of selected foreign
distributors. The Company's management believes that controlling the
distribution of its products throughout the world will be a key element in the
future growth and success of the Company. Executing a business strategy to
achieve this has and will result in additional investments in inventory,
accounts receivable, corporate infrastructure and facilities. It could also
result in disruptions in the distribution of the Company's products in some
areas. There can be no assurance that the acquisition of the Company's foreign
distributors will be successful, and it is possible that the attempt to do so
will adversely affect the Company's business.
As noted above, the Company continues to experience unauthorized
distribution of its products in international markets. For a discussion of the
Company's efforts in this area, see "Sales for Distribution in the United
States" set forth above.
Advertising and Promotion
Within the United States, the Company has focused its advertising
efforts mainly on a combination of television commercials and printed
advertisements in national magazines, such as Golf Digest, Golf Magazine, Golf
Week, Golf World and Sports Illustrated's Golf Edition, and in trade
publications, such as Golf Pro and Golf Shop Operations. Advertising of the
Company's golf clubs outside of the United States is typically handled by
distributors and resellers of the products in a particular country.
The Company also establishes relationships with professional golfers in
order to promote the Callaway Golf brand among both professional and amateur
golfers. The Company has entered into endorsement arrangements with members of
the Senior Professional Golf Association's Tour ("SPGA"), the Professional Golf
Association's Tour ("PGA"), the Ladies Professional Golf Association's Tour
("LPGA"), the European Professional Golf Association's Tour and the Nike Tour.
While most professional golfers fulfill their contractual obligations, some have
been known to stop using a sponsor's products despite contractual commitments.
If one or more of Callaway Golf's pro endorsers were to stop using Callaway
Golf's products contrary to their endorsement agreements, the Company's business
could be adversely affected in a material way by the negative publicity.
During 1996, Callaway Golf continued its Big Bertha(R) Players' Pool
("Pool") for the PGA, SPGA, LPGA and Nike Tours. Those professional players
participating in the Pool received cash for using Callaway Golf metal woods
in professional tournaments. A select few of the Pool players also received
compensation for wearing the Company's logos during tournament play. The
Company has established the 1997 Big Bertha(R) Players' Pool similar to the 1996
Pool, in which professional players participating in the Pool will receive cash
for using certain Callaway Golf products in professional tournaments. The
Company believes that its staff professional program and its Pool contributed to
its success on the professional tours in 1996. There is no guarantee, however,
that the Company will be able to sustain this level of success.
5
To support the promotion of its products at the retail level, the
Company offers various promotional programs to its customers. Golf clubs may be
purchased at a discount for personal use by golf shop professionals,
demonstration, test, loan and rental use.
The Company spent approximately $45.0 million, $37.7 million and $33.9
million on advertising, promotional and endorsement related expenditures,
including compensation to professional golfers, in 1996, 1995 and 1994,
respectively. The Company expects these expenditures to increase during 1997.
MANUFACTURING
The manufacturing of the Company's golf clubs involves a number of
specialized processes required by the unique design of the products. The
Company's metal woods and irons are produced by the Company's manufacturing
personnel at its Carlsbad, California facilities using clubheads, shafts and
grips supplied by independent vendors.
The Company works with a few select casting houses to produce its
clubheads. The clubheads used in the production of Big Bertha(R) Metal Woods
with the War Bird(R) soleplate are manufactured to Callaway Golf's
specifications by Cast Alloys, Inc. and Coastcast Corporation ("Coastcast").
Sturm, Ruger and Company ("Sturm, Ruger"), Coastcast and Cast Alloys, Inc. cast
Great Big Bertha(R) Titanium Metal Wood clubheads. Biggest Big Bertha(TM)
Titanium Driver clubheads are provided by Cast Alloys Inc. and Sturm, Ruger. Big
Bertha(R) Iron clubheads are provided by Hitchiner Manufacturing Co. and
Coastcast. Great Big Bertha(R) Tungsten.Titanium(TM) Irons are provided by
Coastcast, and Big Bertha Gold(TM) Irons are provided by Hitchener Manufacturing
Co. The Company works closely with its casting houses, which enables the Company
to monitor the quality and reliability of clubhead production. All of these
casting houses are currently manufacturing, or are entitled to manufacture,
clubheads for competitors of the Company. The Company also works closely with
Aldila, True Temper, HST, Graphite Design, Inc., Fujikura, Suntech-Sunwoo Co,
Ltd. and Unifiber, its principal suppliers of shafts, to develop specialized
shafts suited to the S2H2(R) design and the other unique features of the
Company's products.
The Company is dependent on a limited number of suppliers for its 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. In the event of
a significant delay or disruption, the Company believes that suitable heads and
shafts could be obtained from other manufacturers, although the transition to
another supplier, particularly with respect to the Biggest Big Bertha(TM)
Titanium Driver and Great Big Bertha(R) Tungsten.Titanium(TM) Irons, could
result in significant production delays and would likely have an adverse impact
on results of operations during the transition.
Callaway Golf's own production processes entail rigorous and continual
quality control inspection and require the application of significant resources
to the manufacturing process. The Company's executive offices and its product
development, manufacturing and distribution facilities are housed in facilities
leased and owned by the Company in Carlsbad, California.
In the ordinary course of its manufacturing process, the Company uses
paints and chemical solvents which are stored on-site. The waste created by use
of these materials is transported off-site on a regular basis by registered
waste haulers. To date, the Company has not experienced any material
environmental compliance problems, although there can be no assurance that such
problems will not arise in the future. Additionally, in the manufacturing
process, the Company has used 1,1,1 trichloroethane ("trichloroethane") which is
considered ozone depleting by the Environmental Protection Agency. Effective
January 1996, the Company began using alternative products for trichloroethane
in its manufacturing processes.
The Company's size has made it a large consumer of certain materials,
including titanium and carbon fiber. Callaway Golf does not make these
materials itself, and must rely on its ability to obtain adequate supplies in
the world marketplace in competition with other users of such materials. While
the Company has been successful in obtaining its requirements for such materials
thus far, there can be no assurance that it will always be able to do so. An
interruption in the supply of such materials or a significant change in costs
could have a material adverse effect on the Company.
6
COMPETITION
The market in which the Company does business is highly competitive, and
is served by a number of well-established and well-financed companies with
recognized brand names. Several companies introduced new products in 1996
(e.g.: Ping "ISI" Irons, Taylor Made "Burner Bubble Shaft" Irons, Cobra "Ti"
Titanium Metal Woods, "King Cobra II" Irons and Armour "Ti 100" Irons) 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 successful marketing activities by competitors
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 the various subjective
requirements of golfers, including the golf club's look and "feel," and the
level of acceptance that the golf club has among professional and other golfers.
The subjective preferences of golf club purchasers may 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.
As noted elsewhere in this Report, the Company has formed Callaway Golf
Ball Company for the purpose of designing, manufacturing and selling golf balls.
The golf ball business is highly competitive with a number of well-established
and well-financed competitors, including Titleist, Spalding, Sumitomo Rubber
Industries, Bridgestone and 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.
INTELLECTUAL PROPERTY
The Company seeks to protect its intellectual property rights, such as
product designs, manufacturing processes, new product research and concepts, and
trademarks. These rights are protected through the acquisition of utility and
design patents and trademark registrations, the maintenance of trade secrets,
the development of trade dress, and, when necessary and appropriate, litigation
against those who are, in the Company's opinion, unfairly competing. In the
United States, the Company has applied for or been granted patents for certain
features of its golf clubs. Additionally, it has been granted trademark
registrations for Callaway(R), Big Bertha(R), War Bird(R) and S2H2(R), and
several other product names and descriptions. There is no assurance that, prior
to a court of competent jurisdiction validating them, any of these patents or
trademarks are enforceable, although the Company believes them to be
enforceable.
The 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 it 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.
The Company has stringent procedures to maintain the secrecy of its
confidential business information. These procedures include criteria for
dissemination of information and written confidentiality agreements with
employees and vendors. Suppliers, when engaged in joint research projects, are
required to enter into additional confidentiality agreements. There can be no
assurance that these measures will prove adequate in all instances to protect
the Company's confidential information.
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. (See also Item 3, "Legal Proceedings"). To date, there have been
no interruptions in the Company's business as the result of any claims of
infringement. No assurance can be given, however, that the Company will not be
adversely affected in the future by the assertion of intellectual property
rights belonging to others. This effect could include alteration of existing
products, withdrawal of existing products and delayed introduction of new
products.
7
Various patents have been issued to the Company's competitors in the golf ball
industry. As Callaway Golf Ball Company develops a new golf ball product, it
must avoid infringing on these patent rights, or it must obtain licenses to use
them lawfully. If any new golf ball product was found to infringe on protected
technology, the Company could incur substantial costs to redesign its golf ball
product or to defend legal action taken against it. Despite its efforts to avoid
such infringements, there can be no assurance that Callaway Golf Ball Company
will not infringe on the patents and other intellectual property rights of third
parties in its development efforts, or that it will be able to obtain licenses
to use any such rights, if necessary.
SEASONALITY
In the golf equipment industry, sales to retailers are generally
seasonal due to lower demand in the retail market in the cold weather months
covered by the fourth and first quarters. Although the Company's business
generally follows this seasonal trend, the Company's increasing sales volume in
many years has tended to mitigate the impact of seasonality on the Company's
operating results. However, in recent years, the Company's operating results
have been more significantly affected by seasonal buying trends, and the Company
expects this trend to continue.
PRODUCT WARRANTIES
The Company supports all of its golf clubs with a two year written
warranty. Since the Company does not rely upon traditional designs in the
development of its golf clubs, its products may be more likely to develop
unanticipated problems than those of many of its competitors which use
traditional designs. For example, clubs have been returned with cracked
clubheads, broken graphite shafts and loose medallions. While any breakage or
warranty problems are deemed significant to the Company, the incidence of clubs
returned as a result of cracked clubheads, broken graphite shafts, loose
medallions and other product problems has not to date been material in relation
to the volume of Callaway Golf clubs which have been sold. The Company monitors
closely the level and nature of any product breakage and, where appropriate,
incorporates design and production changes to assure its customers of the
highest quality available in the market. If Callaway Golf clubs were to
experience a significant increase in the incidence of breakage or other product
problems, the Company's sales and image with golfers would be materially
adversely affected. At December 31, 1996, 1995 and 1994, the Company's reserves
for warranty claims were approximately $27.3 million, $23.8 million and $18.2
million, respectively. The increase in this reserve was primarily attributable
to increased sales volume and change in product mix. The Company believes that
it has sufficient reserves for warranty claims; however, there can be no
assurance that these reserves will be sufficient if the Company were to
experience an unusually high incidence of breakage or other product problems.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 2,152
full-time employees, including 201 employed in sales and marketing, 145 employed
in research and development and product engineering and 1,432 employed in
production. The remaining full-time employees are administrative and support
staff.
The Company considers its employee relations to be good. None of the
Company's employees are represented by unions. The Company's commitment to the
development of new products and the seasonal nature of its business may result
in fluctuations in production levels. The Company attempts to manage these
fluctuations to maintain employee morale and avoid disruption. However, it is
possible that such fluctuations could strain employee relations in the future.
8
ITEM 2. PROPERTIES.
Operations of the Company and its subsidiaries are conducted in both
owned and leased properties. The following table describes the general
character of the important existing facilities:
Location Interest Size (sq.ft.)
-------- -------- -------------
United States
Corporate Headquarters, Manufacturing and
Research & Development Facilities:
2285 Rutherford Road, Carlsbad, California Owned 128,000
5960 Pascal Court, Carlsbad, California Owned 73,000
5957 Landau Court, Carlsbad, California Owned 46,000
5928 Pascal Court, Carlsbad, California Owned 38,000
1911 Palomar Oaks Way, Carlsbad, California Owned 22,000
5860 Dryden Place, Carlsbad, California Owned 10,000
5858 Dryden Place, Carlsbad, California Leased 63,000
5931 Priestly Drive, Carlsbad, California Leased 46,000
2261 Rutherford Road, Carlsbad, California Leased 20,000
5925 Priestly Drive, Carlsbad, California Leased 15,000
5940 Priestly Drive, Carlsbad, California Leased 11,000
5927 Priestly Drive, Carlsbad, California Leased 11,000
2260 Rutherford Road, Carlsbad, California Leased 6,000
Additional Manufacturing/Warehouse Facilities:
2835 La Mirada Drive, Vista, California Leased 32,000
985 Poinsettia Avenue, Vista, California Leased 31,000
2105 Rutherford Road, Carlsbad, California Leased 8,000
-------
560,000
=======
United Kingdom
Headquarters, Sales Office and Warehouse:
Barwell Business Park, Chessington, Surrey, England Leased 16,000
=======
Germany
Headquarters, Sales Office and Warehouse:
Golf Trading GmbH
Luruper Chaussee 125 Leased 13,000
Haus 6, 22761 Hamburg, Germany =======
The Company believes that its facilities are adequate to meet its
current requirements. The Company has experienced rapid growth in its business
for the last several years, however, and in order to accommodate this growth,
the Company has regularly acquired or leased new facilities for manufacturing,
research and development, office and storage. Although there can be no assurance
that the Company will achieve similar growth in its business in the future, the
Company expects that its practice of regularly acquiring or leasing additional
properties near its headquarters in Carlsbad, California is likely to continue
in the near term, including the possible acquisition or leasing of facilities
for Callaway Golf Ball Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages of
development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the 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.
9
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 the 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. 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 plaintiff has
also recently filed a first amended complaint asserting claims for wrongful
termination and termination in violation of public policy. The first amended
complaint seeks damages of $290,000,000, a royalty of $27,000,000, or
compensatory damages for breach of the oral contract and related claims; damages
of approximately $10,000,000 for the wrongful termination; and unspecified
punitive damages and costs. The Company believes there are meritorious defenses
to all of plaintiff's claims, and thus no provision for liability has been made
in the Company's financial statements. Formal discovery has commenced in
preparation for trial. The trial is currently scheduled to commence on October
20, 1997.
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 the probable result of these matters individually and in the
aggregate will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
10
EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information concerning certain of the Company's officers is
set forth below.
Name Age Position(s) Held
---- --- ----------------
Ely Callaway 77 Founder and Chairman of the Board
Donald H. Dye 54 President and Chief Executive Officer
Bruce Parker 41 Senior Executive Vice President, Chief Merchant
John P. Duffy 56 Senior Executive Vice President, Chief of
Manufacturing
Richard C. Helmstetter 55 Senior Executive Vice President, Chief of New
Products
Steven C. McCracken 46 Executive Vice President, Secretary and General
Counsel
Frederick R. Port 55 Executive Vice President, International Sales,
Licensing and Business Development
David A. Rane 42 Executive Vice President, Chief Financial
Officer
Charles J. Yash 48 President and Chief Executive Officer, Callaway
Golf Ball Company
Ely Callaway, Founder, has served as Chairman of the Board since the
Company's formation in 1982, and is the Chairman of the Executive and
Compensation Committee of the Company's Board of Directors. He served as Chief
Executive Officer from 1982 to May 1996. From 1974 to 1981, Mr. Callaway
founded and operated Callaway Vineyard and Winery in Temecula, California, until
it was sold. From 1946 to 1973, Mr. Callaway worked in the textile industry,
where he served as a Divisional President of several major divisions of
Burlington Industries, Inc., and in 1968 was elected Corporate President and
Director of Burlington, which at the time was the world's largest textile
company. Prior to 1945, Mr. Callaway served a five-year tour of duty in the
U.S. Army Quartermaster Corps.
Donald H. Dye serves as President and Chief Executive Officer of the
Company. He has served as Chief Executive Officer since May 1996, as President
since 1993, and as a Director of the Company since its formation in 1982. He
served as Chief Operating Officer from October 1991 until May 1996. From 1973
to 1991, Mr. Dye was in the private practice of law in Riverside, California.
During that period, he provided legal services to Callaway Vineyard & Winery,
Mr. Callaway and the Company. Prior to 1973, Mr. Dye served five years in the
U.S. Air Force as a member of the Judge Advocates General Corps.
Bruce Parker has served as Senior Executive Vice President since 1993,
Chief Merchant since 1991 and as a Director of the Company since July 1996. Mr.
Parker also served the Company in various vice presidential positions since 1984
and became Executive Vice President, Chief Merchant in October 1991. Prior to
1984, Mr. Parker worked as a sales manager for various golf club manufacturers
in California.
John P. Duffy has served the Company in various vice presidential
positions since 1989 and became Executive Vice President, Chief of Manufacturing
in March 1990 and Senior Executive Vice President in April 1993. From 1988 to
1989, Mr. Duffy served as Vice President--Product Line Management of Taylor Made
Golf Company. From 1984 to 1988, Mr. Duffy served as Vice President-
Manufacturing of Taylor Made. From 1982 to 1984, Mr. Duffy served as General
Manager--Western Division of Taylor Made. Prior to 1982, Mr. Duffy owned and
operated golf retail outlets in Florida and California under the name "House of
Golf."
11
Richard C. Helmstetter has served the Company as Senior Executive Vice
President, Chief of New Products since April 1993. Mr. Helmstetter served as
President from 1990 to 1993 and as Executive Vice President from 1986 to 1990.
From 1967 to 1986, Mr. Helmstetter served as President of Adam Ltd., a pool cue
manufacturing and merchandising company which he founded and operated in Japan.
During 1982 and 1983, Mr. Helmstetter also consulted extensively for several
Japanese, European and American companies, including Bridgestone Corporation's
strategic planning group.
Steven C. McCracken has served the Company as Executive Vice President
since April 1996 and as Secretary and General Counsel since April 1994. He
served as Vice President from April 1994 to April 1996. Prior to April 1994,
Mr. McCracken was a partner at Gibson, Dunn & Crutcher for 11 years, and had
been in the private practice of law for over 18 years. During part of that
period, he provided legal services to the Company.
Frederick R. Port has served as Executive Vice President, International
Sales, Licensing and Business Development since April 1996 and as a Director of
the Company since October 1995. He served as Executive Vice President, Business
Development of the Company from September 1995 to April 1996. From 1993 to
1995, Mr. Port was the Managing Director of Korn/Ferry International for the
Southern California region (an executive recruiting and strategic consulting
firm). From 1987 to 1992, he was the President and a Director of the Owl
Companies (a company providing military base services management, construction
materials production and sale, industrial and commercial real estate development
and power development).
David A. Rane has served the Company as Executive Vice President since
April 1996 and as Chief Financial Officer since January 1994. He served as
Vice President from January 1994 to April 1996. Mr. Rane served as Director of
Investor Relations from June 1993 to January 1994. Prior to 1993, Mr. Rane was
a senior manager for the accounting firm of Price Waterhouse LLP, and served a
total of 14 years in public accounting.
Charles J. Yash has served as President and Chief Executive Officer of
Callaway Golf Ball Company, a wholly-owned subsidiary of the Company, since June
1996 and as a Director of the Company since July 1996. From 1992 to June 1996,
Mr. Yash was President and Chief Executive Officer and a Director of Taylor Made
Golf Company. From 1979 to 1992, Mr. Yash was employed in various marketing
positions with the golf products division of Spalding Sports Worldwide,
including Corporate Vice President and General Manager-Golf Products, from 1988
to 1992.
The Company has employment agreements with Messrs. Callaway, Dye and
Helmstetter for terms commencing January 1, 1995 and ending December 31, 1997.
The Company is currently in negotiations with Messrs. Dye and Helmstetter with
respect to new, long-term employment agreements. The Company has new employment
agreements with Messrs. Parker, Duffy, McCracken, Port and Rane for terms
commencing January 1, 1997 and ending on December 31, 1999. The Company also
has an employment agreement with Mr. Yash which commenced May 15, 1996 and ends
on May 14, 2001.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to Item 5 is contained on page 35 of the
Company's 1996 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to Item 6 is contained on page 19 of the
Company's 1996 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Information in response to Item 7 is contained on pages 20, 21 and 22 of
the Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to Item 8 is contained on pages 23 through 36 of
the Company's 1996 Annual Report to Shareholders, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information concerning the Company's executive officers is
included under the caption "Executive Officers of the Registrant" following Part
I, Item 4. Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and greater than 10% shareholders to
file initial reports of ownership (on Form 3) and periodic changes in ownership
(on Forms 4 and 5) of Company securities with the Securities and Exchange
Commission and the New York Stock Exchange. Based solely on its review of copies
of such forms and such written representations regarding compliance with such
filing requirements as were received from its executive officers, directors and
greater than 10% shareholders, the Company believes that all such Section 16(a)
filing requirements were complied with during 1996.
Other information required by Item 10 has been included in the Company's
definitive proxy statement under the caption "Election of Directors," as filed
with the Securities and Exchange Commission (the "Commission") on March 10, 1997
pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The Company maintains employee benefit plans and programs in which its
executive officers are participants. Copies of certain of these plans and
programs are set forth or incorporated by reference as Exhibits 10.1.1 to
10.19.2 to this Report. Information required by Item 11 has been included in the
Company's definitive proxy statement under the captions "Compensation of
Executive Officers," "Report of the Executive and Compensation Committee of the
Board of Directors on Executive Compensation," "Performance Graph" and "Election
of Directors," as filed with the Commission on March 10, 1997 pursuant to
Regulation 14A, which information is incorporated herein by reference.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 has been included in the Company's
definitive proxy statement under the caption "Beneficial Ownership of the
Company's Securities," as filed with the Commission on March 10, 1997 pursuant
to Regulation 14A, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 has been included in the Company's
definitive proxy statement under the caption "Certain Transactions," as filed
with the Commission on March 10, 1997 pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements. The following consolidated
financial statements of Callaway Golf Company and its
subsidiaries included in Part II, Item 8, are
incorporated by reference from pages 23 through 35 of
the 1996 Annual Report to Shareholders:
Consolidated Balance Sheet at December 31, 1996 and
1995
Consolidated Statement of Income for the three years
ended December 31, 1996
Consolidated Statement of Cash Flows for the three
years ended December 31, 1996
Consolidated Statement of Shareholders' Equity for
the three years ended December 31, 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedule.
Report of Independent Accountants on Financial
Statement Schedule
II Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are
not applicable or the required information is shown
in the consolidated financial statements or notes
thereto.
3. Exhibits.
3.1.1 Restated Articles of Incorporation of the
Company.(1)
3.1.2 Certificate of Amendment of Articles of
Incorporation, effective February 10, 1995.(2)
3.2 Certificate of Determination of Rights,
Preferences, Privileges and Restrictions of
Series A Junior Participating Preferred Stock.
(3)
3.3 Bylaws of the Company (as amended through May
10, 1996).(4)
4.1 Dividend Reinvestment and Stock Purchase Plan.
(5)
4.2 Rights Agreement by and between the Company and
Chemical Mellon Shareholder Services as Rights
Agent dated as of June 21, 1995.(3)
14
Executive Compensation Contracts/Plans
10.1.1 Officer Employment Agreement by and between the
Company and Ely Callaway dated January 1, 1995.
(6)
10.1.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Ely Callaway
dated July 19, 1995.(3)
10.2.1 Officer Employment Agreement by and between the
Company and Donald H. Dye dated January 1,
1995.(6)
10.2.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Donald H. Dye
dated July 19, 1995.(3)
10.3 Executive Officer Employment Agreement by and
between the Company and Bruce Parker dated as
of January 1, 1997.
10.4.1 Officer Employment Agreement by and between the
Company and Richard Helmstetter dated January
1, 1995.(6)
10.4.2 Amendment No. 1 to Officer Employment Agreement
by and between the Company and Richard
Helmstetter dated July 19, 1995.(3)
10.5 Executive Officer Employment Agreement by and
between the Company and John Duffy dated
January 1, 1997.
10.6 Executive Officer Employment Agreement by and
between the Company and Steven C. McCracken
dated January 1, 1997.
10.7.1 Executive Officer Employment Agreement by and
between the Company and Frederick R. Port dated
January 1, 1997.
10.7.2 Stock Option Agreement by and between the
Company and Frederick R. Port dated as of
September 1, 1995.(7)
10.8 Executive Officer Employment Agreement by and
between the Company and David Rane dated
January 1, 1997.
10.9.1 Officer Employment Agreement by and between the
Company and Charles J. Yash dated May 10, 1996.
(8)
10.9.2 Stock Option Agreement by and between the
Company and Charles J. Yash.(9)
10.10 Employment Agreement by and between the Company
and Elmer Ward dated July 1, 1996.(10)
10.11.1 Form of Tax Indemnification Agreement.(3)
10.11.2 Form of Amendment No. 1 to Tax Indemnification
Agreement.(10)
10.12 Executive Deferred Compensation Plan (amended
and restated July 1995).(3)
10.13 Callaway Golf Company Executive Non-
Discretionary Bonus Plan.(6)
10.14 Executive Bonus Pool.(11)
10.15 1991 Stock Incentive Plan (as amended and
restated April 1994).(2)
10.16 Amended and Restated Stock Option Plan effective
April 2, 1991.(12)
10.17 1996 Stock Option Plan.
10.18 Callaway Golf Company Non-Employee Directors
Stock Option Plan (as Amended and Restated
April 17, 1996).(9)
10.19.1 Form of Indemnification Agreement by and between
the Company and the following directors:
William Baker, Richard Rosenfield, William
Schreyer and Michael Sherwin, all dated January
25, 1995.(2)
10.19.2 Indemnification Agreement by and between the
Company and Ms. Aulana L. Peters, Director,
dated July 18, 1996.(11)
Other Contracts
10.20.1 Loan Agreement by and between the Company and
First Interstate Bank of California dated
December 1, 1994.(2)
10.20.2 Amended and Restated Revolving Credit Note made
by the Company in the principal amount of
$50,000,000 and payable to First Interstate
Bank of California, dated December 1, 1995 and
First Amendment to Loan Agreement by and
between the Company and First Interstate Bank
of California dated December 1, 1995.(8)
10.21 Trust Agreement between Callaway Golf Company
and Sanwa Bank California as Trustee, for the
benefit of participating employees, dated July
14, 1995.(13)
10.22.1 Industrial lease by and between Dwight and Donna
Johnson and the Company, dated July 16, 1993,
for 2261 Rutherford Road, Carlsbad, California
("Johnson Lease").(14)
15
10.22.2 Amendment No. 1 to Johnson Lease dated October
24, 1994.(8)
10.23.1 Industrial Real Estate Lease by and between Mark
IV Properties, Inc. ("Mark IV") and the
Company, dated March 14, 1994, for 5931
Priestly Drive, Carlsbad, California.(2)
10.23.2 Assignment and Assumption dated December 15,
1995 by Seltzer Chemicals, Inc. ("Seltzer") to
the Company of Interest in Lease Agreement
between Seltzer and Mark IV, as amended through
January 20, 1993, for additional space at 5931
Priestly Drive.(8)
10.24.1 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.(15)
10.24.2 Lease Amendment made as of October 4, 1996
between National Life Insurance Company and
Callaway Golf Company.
11.1 Computation of earnings per share.
13.1 Portions of the Company's 1996 Annual Report to
Shareholders (with the exception of the
information incorporated by reference
specifically in this Report on Form 10-K, the
1996 Annual Report to Shareholders is not
deemed to be filed as a part of this Report on
Form 10-K).
21.1 List of Subsidiaries.
23.1 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
/(1)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-85692), as
filed with the Securities and Exchange Commission on
October 28, 1994, and incorporated herein by reference.
/(2)/ Included as an exhibit to the Company's 1994
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on March 31, 1995, and
incorporated herein by reference.
/(3)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1995,
as filed with the Securities and Exchange Commission on
August 12, 1995, and incorporated herein by reference.
/(4)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 333-5719), as
filed with the Securities and Exchange Commission on
June 11, 1996, and incorporated herein by reference.
/(5)/ Included as the Prospectus in the Company's
Registration Statement on Form S-3 (No. 33-77024), as
filed with the Securities and Exchange Commission on
March 29, 1994, and incorporated herein by reference.
/(6)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995,
as filed with the Securities and Exchange Commission on
May 10, 1995, and incorporated herein by reference.
/(7)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-98750), as
filed with the Securities and Exchange Commission on
October 30, 1995, and incorporated herein by reference.
/(8)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1996,
as filed with the Securities and Exchange Commission on
August 14, 1996, and incorporated herein by reference.
16
/(9)/ Included as an exhibit to the Company's
Registration Statement on Form S-8 (No. 333-5721), as
filed with the Securities and Exchange Commission on
June 11, 1996, and incorporated herein by reference.
/(10)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1996, as filed with the Securities and Exchange
Commission on November 13, 1996, and incorporated herein
by reference.
/(11)/ Included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 33-44556), as
declared effective by the Securities and Exchange
Commission on February 27, 1992, and incorporated herein
by reference.
/(12)/ Included as an exhibit to the Company's 1995
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on April 1, 1996, and
incorporated herein by reference.
/(13)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1995, as filed with the Securities and Exchange
Commission on November 14, 1995, and incorporated herein
by reference.
/(14)/ Included as an exhibit to the Company's 1993
Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission on March 25, 1994, and
incorporated herein by reference.
/(15)/ Included as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996,
as filed with the Securities and Exchange Commission on
May 15, 1996, and incorporated herein by reference.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CALLAWAY GOLF COMPANY
Date: March 26, 1997 /s/ ELY CALLAWAY
------------- ---------------------------
Ely Callaway
Chairman of the Board
/s/ DONALD H. DYE
---------------------------
Donald H. Dye
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:
/s/ ELY CALLAWAY Chairman of the Board March 26, 1997
--------------------- --------------
Ely Callaway
/s/ DONALD H. DYE President and Chief Executive Officer March 26, 1997
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Donald H. Dye
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ DAVID A. RANE Executive Vice President, March 26, 1997
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David A. Rane Chief Financial Officer
OTHER DIRECTORS:
/s/ WILLIAM C. BAKER Director March 26, 1997
--------------------- --------------
William C. Baker
/s/ BRUCE PARKER Director March 26, 1997
--------------------- --------------
Bruce Parker
/s/ AULANA L. PETERS Director March 26 , 1997
--------------------- --------------
Aulana L. Peters
/s/ FREDERICK R. PORT Director March 26, 1997
--------------------- --------------
Frederick R. Port
/s/ RICHARD ROSENFIELD Director March 26, 1997
--------------------- --------------
Richard Rosenfield
/s/ WILLIAM SCHREYER Director March 26, 1997
--------------------- --------------
William Schreyer
/s/ MICHAEL SHERWIN Director March 26, 1997
--------------------- --------------
Michael Sherwin
/s/ ELMER WARD Director March 26, 1997
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Elmer Ward
/s/ CHARLES J. YASH Director March 26, 1997
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Charles J. Yash
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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Callaway Golf Company
Our audits of the consolidated financial statements referred to in our report
dated January 20, 1997 appearing on page 35 of the 1996 Annual Report to
Shareholders of Callaway Golf Company (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
January 20, 1997
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SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996
Allowance Allowance Allowance
for Doubtful for Obsolete for Warranty
Date Accounts Inventory Costs
- ----------------------------------------------------------------------------
(in thousands)
Balance, December 31, 1993 $3,035 $5,155 $ 9,730
Provision 3,479 13,302
Write-off (108) (215) (4,850)
Recovery 6 19
------------------------------------------------
Balance, December 31, 1994 6,412 4,959 18,182
Provision 101 12,002
Write-off (103) (163) (6,415)
Recovery
------------------------------------------------
Balance, December 31, 1995 6,410 4,796 23,769
Provision 231 800 10,735
Write-Off (304) (312) (7,201)
Recovery
------------------------------------------------
Balance, December 31, 1996 $6,337 $5,284 $27,303
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