EXHIBIT 13.1
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Portions of the Callaway Golf Company 1996 Annual Report to Shareholders
Selected Financial Data
(in thousands, except per share data) Year ended December 31,
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1996 1995 1994 1993 1992
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Statement of Income Data:
Net sales $678,512 $553,287 $448,729 $254,645 $132,058
Cost of goods sold 317,353 270,125 208,906 115,458 62,970
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Gross profit 361,159 283,162 239,823 139,187 69,088
Selling, general and administrative expenses 155,177 120,201 106,913 67,118 34,800
Research and development costs 16,154 8,577 6,380 3,653 1,585
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Income from operations 189,828 154,384 126,530 68,416 32,703
Other income, net 5,767 4,017 2,875 1,184 472
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Income before income taxes and cumulative effect of accounting change 195,595 158,401 129,405 69,600 33,175
Provision for income taxes 73,258 60,665 51,383 28,396 13,895
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Income before cumulative effect of accounting change 122,337 97,736 78,022 41,204 19,280
Cumulative effect of accounting change 1,658
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Net income $122,337 $ 97,736 $ 78,022 $ 42,862 $ 19,280
================================================================================================================================
Earnings per Common Share:
Income before cumulative effect of accounting change $ 1.73 $ 1.40 $ 1.07 $ 0.60 $ 0.32
Cumulative effect of accounting change .02
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Net income $ 1.73 $ 1.40 $ 1.07 $ 0.62 $ 0.32
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Dividends paid per share $ 0.24 $ 0.20 $ 0.10 $ 0.03
(in thousands) December 31,
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1996 1995 1994 1993 1992
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Balance Sheet Data:
Cash and cash equivalents $108,457 $ 59,157 $ 54,356 $ 48,996 $ 20,019
Working capital 250,461 146,871 130,792 83,683 39,363
Total assets 428,428 289,975 243,622 144,360 68,937
Long-term liabilities 5,109 2,207 610 3,366
Total shareholders' equity 362,267 224,934 186,414 116,577 49,750
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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When used in this discussion and the financial statements that follow, 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. 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 discussion under the caption "Certain Factors Affecting
the Golf Club Industry and Callaway Golf" in this report, as well as the
Company's periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
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YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, net sales increased 23% to $678.5 million
compared to $553.3 million for the prior year. This increase was attributable
primarily to increased sales of Great Big Bertha(R) Drivers, and Great Big
Bertha(R) Fairway Woods which were introduced in January 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 year ended December 31, 1996, gross profit increased to $361.2 million
from $283.2 million for the prior year and gross margin increased to 53% from
51%. The increase in gross margin was primarily the result of decreases in
component costs and manufacturing labor and overhead costs associated with
increased production volume and improved labor efficiencies.
The Company accrues a provision for warranty expense at the time of sale of
its products. Based on the Company's warranty policies and historical rates of
product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $80.7 million in 1996 from $64.3 million in
1995. The $16.4 million increase was primarily due to increased tour
endorsement, TV advertising and employee compensation expenses. As a percentage
of net sales, selling expenses remained constant at 12%.
General and administrative expenses increased to $74.5 million in 1996 from
$55.9 million in 1995. The $18.6 million increase was related primarily to
increased employee compensation and benefits, consulting costs associated with
the Company's business development initiatives and increases in computer support
and other general and administrative expenses. As a percentage of net sales,
general and administrative expenses increased to 11% from 10%.
Research and development expenses increased to $16.2 million in 1996 as
compared to $8.6 million in 1995. This increase resulted from increased staffing
and operational expenses consistent with the Company's efforts to pursue
potential new business opportunities and the continued focus on developing core
products.
Net interest income increased to $5.0 million in 1996 compared to $3.5 million
in 1995. The increase in interest income was due to the investment of higher
average cash balances.
YEARS ENDED DECEMBER 31, 1995 AND 1994
For the year ended December 31, 1995, net sales increased 23% to $553.3 million
compared to $448.7 million for the prior year. This increase was attributable to
sales of Great Big Bertha(R) Drivers, which were initially announced at the PGA
International Show in August of 1994, and for which shipments, in significant
quantities, began in March 1995. also contributing to the growth in net sales
were increased sales of Big Bertha(R) Metal Woods with the War Bird(R)
soleplate and Big Bertha(R) Irons.
For the year ended December 31, 1995, gross profit increased to $283.2 million
from $239.8 million for the prior year, and gross margin decreased to 51% from
53%. The decrease in gross margin was related to increased labor and overhead
costs associated with the Company's inventory reduction program, increased sales
discounts related to the Company's improved Big Bertha(R) Iron "demo" sales
program and price concessions offered to customers during the fourth quarter of
1995 in anticipation of the introduction of new products in 1996, and increases
in the sales of irons, which had a lower margin as a percentage of net sales
than metal woods.
The Company accrues a provision for warranty expense at the time of sale of
its products. Based on the Company's warranty policies and historical rates of
product returns, the Company believes its accrual for warranty expense to be
adequate.
Selling expenses increased to $64.3 million in 1995 from $59.1 million in
1994. The $5.2 million increase was due to increased tour endorsement expenses,
TV advertising, and sales salaries and commissions expense. As a percentage of
net sales, selling expenses decreased to 12% from 13%, primarily attributable to
management's efforts to control its operating expenses.
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General and administrative expenses increased to $55.9 million in 1995 from
$47.8 million in 1994. The $8.1 million increase was primarily related to
increased employee compensation commensurate with the overall growth of the
Company's operations combined with an increase in depreciation expense
associated with the larger depreciable asset base as compared to 1994. These
increases were partially offset by decreases in the accrual for the allowance
for doubtful accounts and in legal expenses. As a percentage of net sales,
general and administrative expenses decreased to 10% from 11%, primarily
attributable to management's efforts to control its operating expenses.
Research and development expenses increased to $8.6 million in 1995 as
compared to $6.4 million in 1994. This increase resulted from personnel and
facilities expansion, including creation of a shaft development department.
Net interest income amounted to $3.5 million in 1995 compared to $2.5 million
in 1994. The increase in interest income was due to the investment of higher
average cash balances along with higher interest rates during 1995.
CERTAIN FACTORS AFFECTING THE GOLF CLUB INDUSTRY AND CALLAWAY GOLF
The Company believes that the growth rate in the golf equipment industry in the
United States has been modest for the past several years, and this trend is
likely to continue through 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.
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.
However, in recent years, the Company's operating results have been more
significantly affected by seasonal buying trends and we expect this trend to
continue.
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 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 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 new
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 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.
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.
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The Company continues to experience high levels of unauthorized distribution
of its products (i.e., products 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. No assurance can be given,
however, that the Company will not be adversely affected by the assertion of
intellectual property rights belonging to others. This effect could include
alteration of existing products, withdrawal of existing products and delayed
introduction of new products. Such effect may have a material adverse impact on
the Company.
During 1995, the Company began 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 these activities will be successful.
Two of these opportunities identified by the Company relate to the Company's
acquisition of selected foreign distributors and the golf ball business. 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 achieve these
stated goals, and it is possible that the attempt to do so will adversely affect
the Company's business.
In June 1996, the Company formed Callaway Golf Ball Company, a wholly owned
subsidiary of Callaway Golf 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
determined whether Callaway Golf Ball Company 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. 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 factors affecting the golf equipment industry described above, including
growth rate in the golf equipment industry, seasonality and new product
introduction will 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. In addition, 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, cash and cash equivalents increased to $108.5 million from
$59.2 million at December 31, 1995, due to cash flows from operations of $74.7
million, a tax benefit of $14.2 million related primarily to the exercise of
non-qualified stock options, Common Stock transactions totaling $12.3 million,
offset by $35.9 million of net capital expenditures and $16.0 million related to
dividend payments. The Company has available a $50.0 million line of credit and
it 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 including capital expenditures for the foreseeable
future.
Net capital expenditures for the years ended December 31, 1996 and 1995 were
$35.9 million and $29.5 million, respectively. The increase in capital
expenditures for the year ended December 31, 1996 over 1995 was primarily
attributable to the purchase of computer and manufacturing equipment, various
building and facility improvements and the Company's purchase of land and a
building intended for research and development expansion.
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CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data) December 31,
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1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 108,457 $ 59,157
Accounts receivable, net 74,477 73,906
Inventories, net 98,333 51,584
Deferred taxes 25,948 22,688
Other current assets 4,298 2,370
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Total current assets 311,513 209,705
Property, plant and equipment, net 91,346 69,034
Other assets 25,569 11,236
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$ 428,428 $ 289,975
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,996 $ 26,894
Accrued employee compensation and benefits 16,195 10,680
Accrued warranty expense 27,303 23,769
Income taxes payable 2,558 1,491
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Total current liabilities 61,052 62,834
Long-term liabilities (Note 6) 5,109 2,207
Commitments (Note 7)
Shareholders' equity:
Preferred Stock, $.01 par value, 3,000,000 shares authorized,
none issued and outstanding at December 31, 1996 and 1995
Common Stock, $.01 par value, 240,000,000 shares authorized,
72,855,222 and 70,912,129 issued and outstanding at
December 31, 1996 and 1995 (Note 4) 729 709
Paid-in capital 278,669 214,846
Unearned compensation (3,105) (2,420)
Retained earnings 238,349 131,712
Less: Grantor stock trust (5,300,000 shares at December 31, 1996 (152,375) (119,913)
and 1995) at market (Note 4)
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Total shareholders' equity 362,267 224,934
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$ 428,428 $ 289,975
===================================================================================================
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data) Year ended December 31,
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1996 1995 1994
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Net sales $678,512 100% $553,287 100% $448,729 100%
Cost of goods sold 317,353 47% 270,125 49% 208,906 47%
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Gross profit 361,159 53% 283,162 51% 239,823 53%
Selling expenses 80,701 12% 64,310 12% 59,065 13%
General and administrative expenses 74,476 11% 55,891 10% 47,848 11%
Research and development costs 16,154 2% 8,577 2% 6,380 1%
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Income from operations 189,828 28% 154,384 28% 126,530 28%
Interest and other income, net 5,767 4,017 2,875
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Income before income taxes 195,595 29% 158,401 29% 129,405 29%
Provision for income taxes 73,258 60,665 51,383
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Net income $122,337 18% $ 97,736 18% $ 78,022 17%
=================================================================================================
Earnings per common share $1.73 $1.40 $1.07
Common equivalent shares 70,661 69,855 73,104
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Year ended December 31,
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1996 1995 1994
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Cash flows from operating activities:
Net income $ 122,337 $ 97,736 $ 78,022
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,691 10,778 6,184
Non-cash compensation 4,194 2,027 2,070
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net 3,510 (43,923) (12,400)
Inventories, net (44,383) 22,516 (45,045)
Deferred taxes (4,420) 4,978 (11,737)
Other assets (12,889) (6,573) (4,531)
Accounts payable and accrued expenses (15,395) 9,227 5,569
Accrued employee compensation and benefits 2,031 1,322 3,247
Accrued warranty expense 3,534 5,587 8,451
Income taxes payable 626 (9,845) 11,372
Other liabilities 2,902 1,597 610
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Net cash provided by operating activities 74,738 95,427 41,812
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Cash flows from investing activities:
Capital expenditures (35,352) (29,510) (26,137)
Sale of fixed assets 72 55
Acquisition of a business, net of cash acquired (610)
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Net cash used in investing activities (35,890) (29,455) (26,137)
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Cash flows from financing activities:
Issuance of Common Stock 12,258 7,991 5,050
Retirement of Common Stock (67,022) (14,942)
Tax benefit from exercise of stock options 14,244 11,236 6,410
Dividends paid, net (16,025) (13,350) (6,850)
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Net cash provided by (used in) financing activities 10,477 (61,145) (10,332)
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Effect of exchange rate changes on cash (25) (26) 17
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Net increase in cash and cash equivalents 49,300 4,801 5,360
Cash and cash equivalents at beginning of year 59,157 54,356 48,996
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Cash and cash equivalents at end of year $ 108,457 $ 59,157 $ 54,356
====================================================================================================================================
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands) Common Stock
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Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
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Balance, December 31, 1993 67,590 $ 677 $ 60,398 $ (2,591) $ 58,093 $116,577
Exercise of stock options 1,410 13 5,045 (8) 5,050
Tax benefit from exercise of stock options 6,410 6,410
Compensatory stock options 3,114 (1,079) 2,035
Compensatory stock 2 35 35
Stock retirement (907) (10) (14,932) (14,942)
Cash dividends (6,850) (6,850)
Equity adjustment from foreign currency 77 77
Net income 78,022 78,022
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Balance, December 31, 1994 68,095 680 75,002 (3,670) 114,402 186,414
Exercise of stock options 2,329 24 7,971 (4) 7,991
Tax benefit from exercise of stock options 11,236 11,236
Compensatory stock options 759 1,250 2,009
Compensatory stock 1 18 18
Stock retirement (4,813) (48) (66,974) (67,022)
Cash dividends (13,550) (13,550)
Dividends on shares held by GST 200 200
Equity adjustment from foreign currency (98) (98)
Establishment of GST 5,300 53 86,785 $ (86,838)
Adjustment of GST shares to market value 33,075 (33,075)
Net income 97,736 97,736
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Balance, December 31, 1995 70,912 709 214,846 (2,420) 131,712 (119,913) 224,934
Exercise of stock options 1,775 18 12,240 12,258
Tax benefit from exercise of stock options 14,244 14,244
Compensatory stock options 2,604 (685) 1,919
Employee stock purchase plan 168 2 2,273 2,275
Cash dividends (17,297) (17,297)
Dividends on shares held by GST 1,272 1,272
Equity adjustment from foreign currency 325 325
Adjustment of GST shares to market value 32,462 (32,462)
Net income 122,337 122,337
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Balance, December 31, 1996 72,855 $ 729 $278,669 $ (3,105) $ 238,349 $(152,375) $ 362,267
===================================================================================================================================
See accompanying notes to consolidated financial statements.
-26-
Notes to Consolidated Financial Statements
Note 1
THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Callaway Golf Company ("Callaway" or the "Company") is a California corporation
formed in 1982. The Company designs, develops, manufactures and markets high-
quality, innovative golf clubs. Callaway's primary products during 1996, 1995
and 1994 included Big Bertha(R) Metal Woods, Big Bertha(R) Metal Woods with the
War Bird (R)soleplate, Great Big Bertha(R) Metal Woods, Big Bertha(R) Irons,
S2H2(R) Irons, and various putters. The consolidated financial statements
include the accounts of the Company and its subsidiaries, Callaway Golf Sales
Company, Callaway Golf Ball Company, Callaway Golf (UK) Limited and Callaway
Golf (Germany) GmbH. All significant intercompany transactions and balances have
been eliminated.
REVENUE RECOGNITION
Sales are recognized at the time goods are shipped, net of an allowance for
sales returns.
ADVERTISING COSTS
The Company advertises primarily through television and print media. The
Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expenses for 1996, 1995 and 1994 were $18,321,000,
$12,148,000 and $9,833,000, respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative translation
gains or losses are recorded as a separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's local currency) are included
in the consolidated statement of income and are not material.
During 1996, 1995 and 1994, the Company entered into forward foreign currency
exchange rate contracts to hedge payments due on inter-company transactions by
its wholly owned foreign subsidiary, Callaway Golf (UK) Limited. Realized and
unrealized gains and losses on these contracts are recorded in income. 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 December 31, 1996,
1995 and 1994, the Company had approximately $5,774,000, $446,000 and
$2,348,000, respectively, of foreign exchange contracts outstanding. The
contracts outstanding at December 31, 1996 mature between January and April of
1997. The Company had net realized and unrealized losses on foreign exchange
contracts of approximately $521,000 in 1996, net realized and unrealized gains
of $106,000 in 1995 and net realized and unrealized losses of $132,000 in 1994.
EARNINGS PER COMMON SHARE
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 in
1996, 1995 and 1994. Shares owned by the Callaway Golf Company Grantor Stock
Trust (Note 4) 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 shares under the Callaway Golf
Shareholder Rights Plan (Note 5) have not been included in weighted average
share amounts as the conditions necessary to cause these rights to be redeemed
were not met.
FINANCIAL STATEMENT PREPARATION
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.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with maturities of
three months or less. Cash equivalents consist of investments in money market
accounts and U.S. Treasury bills.
At December 31, 1996 and 1995, the Company held investments in U.S. Treasury
bills with maturities of three months or less in the aggregate amount of $96.4
million and $44.7 million, respectively. Management determines the appropriate
classification of its U.S. Government securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company has
recorded these securities at amortized costs as it has designated them as "held-
to-maturity."
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
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PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of three to fifteen years. Repairs and maintenance costs are charged to
expense as incurred.
STOCK-BASED COMPENSATION
During the year ended December 31, 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".
See Note 5 for pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
LONG-LIVED ASSETS
In accordance with 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 Company reviews for the impairment of long-lived assets,
certain identifiable intangibles, and associated goodwill, whenever 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 estimated future
cash flows is less than the carrying amount of the asset. No impairment losses
have been identified by the Company.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax asset or liability is established
for the expected future consequences resulting from the differences in the
financial reporting and tax basis of assets and liabilities. Deferred income tax
expense (benefit) is the net change during the year in the deferred income tax
asset or liability.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of credit
risk consist primarily of cash equivalents and trade receivables.
The Company invests its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to diversification
and maturities in an effort to maintain safety and liquidity. These guidelines
are periodically reviewed and modified to take advantage of trends in yields and
interest rates.
The Company operates in the golf equipment industry and primarily sells its
products to golf equipment retailers. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains reserves for potential
credit losses.
Note 2
SELECTED FINANCIAL STATEMENT INFORMATION
(in thousands) December 31,
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
Cash and cash equivalents:
U.S. Treasury bills $ 96,407 $ 44,687
Cash, interest bearing 11,415 3,598
Cash, non-interest bearing 635 10,872
- ----------------------------------------------------------------------------
$108,457 $ 59,157
============================================================================
Accounts receivable, net:
Trade accounts receivable $ 80,814 $ 80,316
Allowance for doubtful accounts (6,337) (6,410)
- ----------------------------------------------------------------------------
$ 74,477 $ 73,906
============================================================================
Inventories, net:
Raw materials $ 50,012 $ 23,980
Work-in-progress 1,651 1,109
Finished goods 51,954 31,291
- ----------------------------------------------------------------------------
103,617 56,380
Reserve for obsolescence (5,284) (4,796)
- ----------------------------------------------------------------------------
$ 98,333 $ 51,584
============================================================================
Property, plant and equipment, net:
Land $ 9,589 $ 7,689
Buildings and improvements 35,076 28,578
Machinery and equipment 29,778 17,359
Furniture, computers and equipment 20,329 15,447
Production molds 9,399 7,908
Construction in progress 21,003 13,338
- ---------------------------------------------------------------------------
125,174 90,319
Accumulated depreciation (33,828) (21,285)
- ---------------------------------------------------------------------------
$ 91,346 $ 69,034
===========================================================================
Accounts payable and accrued expenses:
Accounts payable $ 2,442 $ 9,486
Accrued expenses 12,554 17,408
- ---------------------------------------------------------------------------
$ 14,996 $ 26,894
===========================================================================
Accrued employee compensation and benefits:
Accrued payroll and taxes $ 12,914 $ 7,997
Accrued vacation and sick pay 3,017 2,659
Accrued commissions 264 24
- ---------------------------------------------------------------------------
$ 16,195 $ 10,680
===========================================================================
Total rent expense was $1,363,000, $1,181,000 and $531,000 in 1996, 1995 and
1994, respectively.
-28-
Note 3
BANK LINE OF CREDIT
The Company has a $50,000,000 bank line of credit with an interest rate equal to
the bank's prime rate. The interest rate at December 31, 1996 was 8.25%. The
line of credit has been primarily utilized to support the issuance of letters of
credit of which there were $3,921,000 outstanding at December 31, 1996, reducing
the amount available under the Company's line of credit to $46,079,000.
The line of credit is unsecured and is subject to renewal on December 15,
1997. The line requires the Company to maintain certain financial ratios,
including current and debt to equity ratios. The Company is also subject to
other restrictive covenants under the terms of the credit agreement.
Note 4
COMMON AND PREFERRED STOCK
As of December 31, 1996, the Company had 240,000,000 authorized shares of Common
Stock, $.01 par value, of which 72,855,222 were issued and outstanding.
During 1995 and 1994, the Company repurchased and retired 4,813,000 and
908,000 shares of its Common Stock at an average price per share of $13.93 and
$16.45, respectively, for a total purchase price of $67,022,000 in 1995 and
$14,942,000 in 1994.
As of December 31, 1996, the Company was authorized to issue up to 3,000,000
shares of $.01 par value Preferred Stock. No preferred shares have been issued.
In July 1995 the Company established the Callaway Golf Company Grantor Stock
Trust (GST). In conjunction with the formation of the GST, the Company sold
4,000,000 shares of newly issued Common Stock to the GST at a purchase price of
$60,575,000 ($15.14 per share). In December 1995 the Company sold an additional
1,300,000 shares of newly issued Common Stock to the GST at a purchase price of
$26,263,000 ($20.20 per share). The sale of these shares had no net impact on
shareholders' equity. 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.
Note 5
STOCK OPTIONS AND RIGHTS
During 1991, the Company adopted the 1991 Stock Incentive Plan ("the Incentive
Plan") for its officers, directors, key employees and consultants. All
directors, officers, key employees of and consultants to the Company were
eligible for awards under the Incentive Plan except that no director of the
Company who is not also an employee of the Company is eligible to receive any
award under the Incentive Plan. Under the Incentive Plan, options to purchase
Common Stock may be granted with an option price less than the then current
market value of such stock. A total of 10,000,000 shares have been reserved for
issuance under the Incentive Plan. Options to purchase 25,500, 2,281,000 and
220,000 shares of Common Stock at exercise prices of $12.75 to $33.13 per share
were granted in 1996, 1995 and 1994, respectively. At December 31, 1996, 138,100
shares were available for grant under this Plan.
During 1992, the Company adopted the Promotion, Marketing and Endorsement
Stock Incentive Plan ("the Promotion Plan") for golf professionals and other
parties who endorse the Company's products. Under the Promotion Plan, up to
3,560,000 shares of Common Stock may be granted in the form of stock options or
other stock awards at prices which may be less than the then current market
value of the stock. Options to purchase 220,000, 79,000 and 892,000 shares of
Common Stock at exercise prices of $5.25 to $33.88 per share were granted in
1996, 1995 and 1994, respectively. Common Stock grants totalling 1,300 and 2,000
were granted under the Promotion Plan in 1995 and 1994, respectively. At
December 31, 1996, 1,007,700 shares were available for grant under this Plan.
During 1993, the Company adopted the Non-Employee Directors Stock Option Plan.
Under the Plan, options to purchase up to 840,000 shares of Common Stock may be
granted at prices less than the then current market value of the stock to the
non-employee directors based on a non-discretionary formula. Options to purchase
112,000, 10,000 and 256,000 shares of Common Stock at exercise prices of $10.98
to $33.63 per share were issued to non-employee directors in 1996, 1995 and
1994, respectively. At December 31, 1996, 276,000 shares were available under
this Plan.
During 1995, the Company adopted the 1995 Employee Stock Incentive Plan ("1995
Plan") for its employees and consultants. All employees of and consultants to
the Company are eligible for awards under the 1995 Plan, except that no director
or officer of the Company is eligible to receive any award under the 1995 Plan.
Under the 1995 Plan, options to purchase Common Stock may be granted with an
option price less than the then current market value of such stock. A total of
3,000,000 shares have been reserved for issuance under the 1995 Plan. Options to
purchase 1,482,500 and 275,000 shares of Common Stock at exercise prices of
$19.13 to $34.38 per share were granted in 1996 and 1995, respectively. At
December 31, 1996, 1,244,500 shares were available for grant under this Plan.
-29-
During 1995, the Company granted options to purchase 500,000 shares of Common
Stock at prices of $14.88 and $19.88 per share to a key officer, in conjunction
with the terms of his initial employment.
During 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan").
This plan is intended primarily for officers, although all employees,
consultants and advisors to the Company are eligible for awards under the 1996
Plan. No director of the Company is eligible to receive any award under the 1996
Plan. Under the 1996 Plan, options to purchase Common Stock may be granted with
an option price up to 15% less than the then current market value of such stock.
A total of 2,000,000 shares have been reserved for issuance under the 1996 Plan.
Options to purchase 320,000 shares of Common Stock at an exercise price of
$31.13 were granted in 1996. At December 31, 1996, 1,680,000 shares were
available for grant under this Plan.
During 1996, the Company granted options to purchase 600,000 shares of Common
Stock at $25.13 per share to a key officer, in conjunction with the terms of his
initial employment.
As of December 31, 1996, 3,939,000 options were exercisable under the Company
Plans. The following summarizes stock option transactions for the years ended
December 31, 1996, 1995 and 1994:
(shares in thousands) Year ended December 31,
- -----------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
Outstanding at
beginning of period 9,842 10,652 10,756
Granted 2,760 3,145 1,368
Exercised (1,775) (2,329) (1,410)
Canceled (27) (1,626) (62)
- -----------------------------------------------------------------------
Outstanding at end of year 10,800 9,842 10,652
- -----------------------------------------------------------------------
Price range of
outstanding options $.44-$34.38 $.19-$19.88 $.19-$18.06
=======================================================================
The Company has granted officers, consultants and employees rights to receive
an aggregate of 826,880 shares of Common Stock for services or other
consideration. No rights were granted or exercised during 1996, 1995 or 1994.
At December 31, 1996, rights to receive 80,000 shares of Common Stock remained
outstanding.
During August 1995, the Company canceled 634,000 employee stock options,
exclusive of those held by directors, with option prices in excess of the then
current market price of the Company's stock. The Company then reissued an
equivalent number of options at the current market price.
The Company has an Employee Stock Purchase Plan (ESPP) for all eligible
employees to purchase shares of Common Stock at 85% of the lower of the fair
market value on the first day of a two year offering period or last day of each
six month exercise period. Employees may authorize the Company to withhold
compensation during any offering period, subject to certain limitations. At
December 31, 1996, the ESPP had purchased, or was obligated to buy,
approximately 401,000 shares of the Company's Common Stock and 99,000 shares
were reserved for future issuance.
During 1996, 1995, and 1994, the Company recorded $1,919,000, $2,009,000 and
$2,035,000, respectively, in compensation expense as the value of options and
rights to purchase shares of Common Stock granted to employees of and
consultants to the Company. The valuation of the options and rights granted to
employees is based on the difference between the exercise price and the market
value of the stock on the date of the grant. The valuation of the options and
rights granted to non-employees is based on an option pricing model.
Unearned compensation has been charged for the value of options granted to
both employees and non-employees on the date of grant based on the valuation
described above. These amounts are amortized over the vesting period of employee
options and over the contract terms with non-employees. The unamortized portion
of unearned compensation is shown as a reduction of shareholders' equity in the
accompanying consolidated balance sheet.
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.
Under the Company's employee stock option plans, options to purchase Common
Stock may be granted with an option price less than the fair market value of the
shares on the date of grant. Currently outstanding options vest over periods
ranging from zero to five years from the grant date and expire up to ten years
after the date of grant.
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31, 1996. In
accordance with the provisions of SFAS 123, the Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for options granted to non-employees.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net income and earnings per
share would be reduced to the pro forma amounts indicated on the following page:
-30-
(thousands, except per share amounts) December 31,
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
Net income:
As reported $122,337 $97,736
Pro forma $113,587 $95,510
Earnings per common share:
As reported $ 1.73 $ 1.40
Pro forma $ 1.59 $ 1.36
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following assumptions for the years ended
December 31, 1996 and 1995, respectively; dividend yields of .9 percent,
expected volatility of 31.5 percent, risk free interest rates ranging from 5.32
to 7.66 percent, and expected lives ranging from 2 to 6 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock based compensation plans.
The following table summarizes information about stock based compensation
plans outstanding at December 31, 1996:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF DECEMBER 31, 1996
(options outstanding and exercisable in thousands)
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
- -------------------------------------------------------------------------------------
$ 0-$12 4,371 4.4 $ 5.68 2,626 $ 5.09
$ 12-$20 3,779 5.4 $16.49 1,028 $14.55
$ 21-$34 2,650 6.4 $28.82 285 $25.53
- -------------------------------------------------------------------------------------
$ 0-$34 10,800 3,939
=====================================================================================
During the years ended December 31, 1996 and 1995, the number of shares of
stock granted under the ESPP and the weighted average fair values were 302,000
and $17.47; and 99,000 and $8.80, respectively.
-31-
Note 6
EMPLOYEE BENEFIT PLANS
The Company has a voluntary deferred compensation plan under Section 401(k) of
the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the
age and service requirements under the 401(k) Plan. Each participant may elect
to contribute up to the maximum permitted under federal law, and the Company is
obligated to contribute annually an amount equal to 100% of the participant's
contribution up to 6% of that participant's annual compensation. Additionally,
the Company can make discretionary contributions based on the profitability of
the Company. For the years ended December 31, 1996, 1995 and 1994, the Company
recorded compensation expense for discretionary contributions of $6,390,000,
$6,481,000 and $5,000,000, respectively, and employees contributed $3,315,000,
$3,336,000 and $2,271,000, respectively, to the 401(k) Plan. In accordance with
the provisions of the 401(k) Plan, the Company matched employee contributions in
the amount of $1,988,000, $1,458,000 and $1,087,000 during 1996, 1995 and 1994,
respectively.
The Company also has an unfunded, non-qualified deferred compensation plan.
The plan allows officers and certain other employees of the Company to defer all
or part of their compensation, to be paid to the participants or their
designated beneficiaries upon retirement, death or separation from the Company.
For the years ended December 31, 1996, 1995 and 1994, the total participant
deferrals, which is reflected in long-term liabilities, was $2,564,000,
$1,460,000 and $610,000, respectively. The plan expenses for 1996, 1995 and 1994
were approximately $9,000, $5,000 and $18,000, respectively.
Note 7
COMMITMENTS & CONTINGENCIES
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 25% of all graphite shafts required in the manufacture
of its golf clubs through May 1998.
The Company has committed to purchase titanium golf club heads costing
approximately $68,550,000 from one of its vendors. These heads are to be shipped
to the Company in accord with a production schedule that runs through September
1998.
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 agreement, 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 December 31, 1996, the Company had made capital contributions of
$6,460,000 to the joint venture, which had not commenced operations. 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. While the costs of a possible dissolution of the
joint venture are not known at this time, management does not believe that such
costs would have an adverse material impact on the financial position, results
of operations or cash flows of 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. 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 plaintiff's claims and thus no provision for any
liability has been made in the financial statements.
The Company has certain contingent liabilities resulting from litigation and
claims incident to the ordinary course of business. Management believes the
probable resolution of such contingencies will not materially affect the
financial position, results of operations or cash flows of the Company.
-32-
Note 8
INCOME TAXES
Income before income taxes for the years ended December 31 was taxed under the
following jurisdictions:
(in thousands) Year ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Domestic $193,170 $154,054 $126,471
Foreign 2,425 4,347 2,934
- ----------------------------------------------------------------------------------------------------
Total $195,595 $158,401 $129,405
====================================================================================================
The provision for income taxes is as follows:
(in thousands) Year ended December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Current tax provision:
Federal $ 65,287 $ 48,563 $ 50,069
State 11,154 9,840 13,007
Foreign 1,244 1,626 777
Deferred tax (benefit) expense
Federal (3,911) (317) (10,467)
State (437) 1,053 (2,003)
Foreign (79) (100)
- ----------------------------------------------------------------------------------------------------
Provision for income taxes $ 73,258 $ 60,665 $ 51,383
====================================================================================================
During 1996, 1995, and 1994, the Company recognized certain tax benefits related
to stock option plans in the amount of $14,244,000, $11,236,000 and $6,410,000,
respectively. Such benefits were recorded as a reduction of income taxes payable
and an increase in additional paid-in capital.
Deferred tax assets are comprised of the following:
(In thousands) Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Reserves and allowances $15,056 $16,381
Depreciation and amortization 5,585 4,297
Deferred compensation 3,088 2,019
Effect of inventory overhead adjustment 2,057 1,414
Compensatory stock options and rights 1,541 1,346
State taxes, net 697 972
Other 3,437 605
- --------------------------------------------------------------------------------
Net deferred tax asset $31,461 $27,034
================================================================================
The Company did not require a deferred tax asset valuation allowance at
December 31, 1996 or 1995. A reconciliation of the provision for income taxes to
the amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
(in thousands) Year ended December 31,
- ------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------
Amounts computed at
statutory federal tax rate $ 68,458 $ 55,440 $ 45,292
State income taxes, net of
federal benefit 6,966 7,081 7,153
Other (2,166) (1,856) (1,062)
- -------------------------------------------------------------------------------------------
Provision for income taxes $ 73,258 $ 60,665 $ 51,383
===========================================================================================
-33-
Note 9
SALES INFORMATION
The Company is engaged in domestic and international sales within the following
geographic areas:
(In thousands) Year ended December 31,
- --------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------
United States $460,611 $367,359 $331,493
Japan 58,156 60,971 45,944
All others--individually less
than 10% of net sales 159,745 124,957 71,292
- --------------------------------------------------------------------------------------
$678,512 $553,287 $448,729
======================================================================================
The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. (Sumitomo) as the sole distributor of Callaway 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. In 1996, 1995 and 1994, sales to
Sumitomo accounted for 9%, 11% and 10%, respectively, of the Company's net
sales.
Note 10
SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
Cash paid for interest during 1996, 1995 and 1994 was $37,000, $21,000 and
$4,000, respectively.
Income taxes paid in 1996, 1995 and 1994 amounted to $62,938,000, $58,543,000
and $45,776,000, respectively.
Note 11
SUBSEQUENT EVENT
On January 22, 1997, the Company declared a quarterly cash dividend of $.07 per
share payable on February 25, 1997, to shareholders of record on February 4,
1997.
-34-
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO OF PRICE WATERHOUSE LLP]
To the Board of Directors and Shareholders of Callaway Golf Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Callaway
Golf Company and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 20, 1997
MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on the New York Stock Exchange (NYSE).
The Company's symbol for its Common Shares is "ELY." The stock price
information set forth below has been retroactively restated to reflect the two-
for-one stock split effective February 10, 1995.
As of February 20, 1997, the approximate number of holders of record of the
Company's Common Stock was 6,684.
STOCK INFORMATION
FISCAL 1996 FISCAL 1995
- -----------------------------------------------------------------------------------------
PERIOD: HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- -----------------------------------------------------------------------------------------
FIRST QUARTER $28.13 $18.50 $.06 $18.13 $13.25 $.05
SECOND QUARTER 33.88 24.50 .06 16.88 11.25 .05
THIRD QUARTER 36.63 27.88 .06 17.00 13.38 .05
FOURTH QUARTER 36.63 26.63 .06 22.63 14.38 .05
-35-
Summarized Quarterly Financial Data (unaudited)
(in thousands, except per share data) Fiscal Year 1996 Quarters
- ------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------------
Net sales $135,138 $210,002 $194,545 $138,827 $678,512
Gross profit 68,632 111,083 106,071 75,373 361,159
Net income 19,455 38,937 38,418 25,527 122,337
Earnings per common share $ 0.28 $ 0.55 $ 0.54 $ 0.36 $ 1.73
Fiscal Year 1995 Quarters
- ------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------------
Net sales $119,025 $155,699 $155,924 $122,639 $553,287
Gross profit 60,476 79,836 80,794 62,056 283,162
Net income 16,904 27,329 30,178 23,325 97,736
Earnings per common share $ 0.23 $ 0.39 $ 0.44 $ 0.34 $ 1.40
-36-