Callaway 1999 Annual Report Download

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CALLAWAY GOLF COMPANY 1999 Annual Report

Table of contents

  • Page 1
    C ALL AWAY GOLF COMPANY 1999 Annual Report

  • Page 2
    ...Titanium Metal Woods and Hawk Eye® Tungsten Injected™ Titanium Irons, Big Bertha® Steelhead Plus™ Stainless Steel Metal Woods and Steelhead™ X-14™ Stainless Steel Irons and Bobby Jones® and Carlsbad Series™ Putters. Callaway Golf Company also makes and sells Odyssey® Putters and Wedges...

  • Page 3
    FINANCIAL HIGHLIGHTS (in thousands, except per share data) 1999 1998 1997 1996 1995 1994 1993 1992 ** Net sales Pretax income (loss) Net income (loss) Basic earnings (loss) per share* Diluted earnings (loss) per share Shareholders' equity Market capitalization at December 31 * $714,471 $...

  • Page 4
    ... Senior Executive Vice President, Golf Balls, for the parent Company. During 1999 the Board and I became increasingly convinced that we were very fortunate to have someone as capable, experienced and dedicated as Chuck already working on the management team. We quickly concluded that we need search...

  • Page 5
    SALES (From left to right) Peter Gotfredson, Vice President, Sales and Marketing, Callaway Golf Ball Company; Chris Holiday, Senior Vice President, U.S. Sales; Jim Chenevey, Senior Vice President, International Sales; Mick McCormick, Executive Vice President, Global Sales 6 C A L L A W A Y G O...

  • Page 6
    C ALL AWAY GOLF BALL COMPANY (From left to right) David Felker, Vice President, Research; Bill Schlegel, Vice President, Manufacturing and Operations; Chuck Yash, President and Chief Executive Officer, Callaway Golf Ball Company 4 C A L L A W A Y G O L F C O M P A N Y C A L L A W A Y G O...

  • Page 7
    ... manufacturing, respectively. â- Based on our ongoing R&D efforts, we were able to launch three new products to the golf club markets of the world in 1999. The Great Big Bertha® Hawk Eye® Titanium Metal Woods with the Tungsten Gravity Screw and the Hawk Eye® Tungsten Injectedâ„¢ Titanium Irons...

  • Page 8
    ...relationship with Sumitomo Rubber Industries, Ltd., our distributor in Japan for the previous 12 years. â- We completely revamped our golf club manufacturing policies, practices and procedures at our Carlsbad headquarters. The result was that we produced more golf clubs per employee than ever, at...

  • Page 9
    MANUFACTURING RESEARCH AND (From left to right) Bob Penicka, Vice President, Manufacturing Technology; Geoff Goodman, Senior Vice President, Golf Club Research and Development DEVELOPMENT 4 C A L L A W A Y G O L F C O M P A N Y C A L L A W A Y G O L F C O M P A N Y 7

  • Page 10
    ... to right) Ken Wolf, Senior Vice President, Finance and Controller; Carol Kerley, Senior Vice President, I.S. and Chief Information Officer; Larry Dorman, Vice President, Advertising, Press and Public Relations; Donna Kaptain, Senior Vice President, Human Resources; Steve McCracken, Executive Vice...

  • Page 11
    ...will be reasonably rewarded if management continues to considerably outperform our competition as we have done in the golf club business, and as I believe we will do in the golf ball business. But what else can we do about the price of our stock? Some have suggested that we should be buying back our...

  • Page 12
    ...) Callaway Golf Staff Professionals Jesper Parnevik (PGA TOUR), Paul Lawrie (PGA EUROPEAN TOUR), Carlos Franco (PGA TOUR), Olin Browne (PGA TOUR), Rocco Mediate (PGA TOUR), Colin Montgomerie (PGA EUROPEAN TOUR); (on far right) Mike Galeski, Senior Vice President, Tour Relations. Other Callaway Golf...

  • Page 13
    ...Sorenstam. ASIAN TOUR - Kyi Hla Han, Prayad Marksaeng. BUY.COM TOUR - Angel Franco. SENIOR PGA TOUR - Bob ...TOUR - Michael Campbell, Gary Emerson, Gary Evans, Pierre Fulke, Bernard Gallacher, Barry Lane, Mark McNulty, Per Nyman, Andrew Oldcorn, Eduardo Romero, Roger Winchester. JAPANESE PGA TOUR...

  • Page 14
    12 C A L L A W A Y G O L F C O M P A N Y

  • Page 15
    C A L L A W A Y G O L F C O M P A N Y 13

  • Page 16
    ... Board. In addition to his service on the Callaway Golf Board, Bill has served as Chairman of the Board and Chief Executive Officer of Merrill Lynch and as a Director on the Boards of Deere & Company, Schering-Plough Corporation, and Iridium World Communications Ltd. He is a Trustee, International...

  • Page 17
    ... Selected Financial Data ...16 Management's Discussion and Analysis of Financial Condition ...Notes to Consolidated Financial Statements ...32 Report of Independent Accountants ...47 Summarized Quarterly Financial Data (unaudited) ...48 Market for Common Shares and Related Shareholder Matters ......

  • Page 18
    SELECTED FINANCIAL DATA (in thousands, except per share data) 1999 1998 Year ended December 31, 1997 1996 1995 Statement of Operations Data: Net sales Cost of goods sold Gross profit Selling, general and administrative expenses Research and development costs Restructuring costs (Note 12) Sumitomo...

  • Page 19
    ....6 million decrease in sales of Big Bertha® X-12® Irons, which were introduced in January 1998, partially offset by sales from the August 1999 introduction of Hawk Eye® Tungsten Injected™ Titanium Irons of $27.7 million. Sales of Odyssey® and Callaway Golf® putters decreased $7.5 million (14...

  • Page 20
    ... metal wood wholesale price reduction on Big Bertha® War Bird® Stainless Steel Metal Woods and Great Big Bertha® and Biggest Big Bertha® Titanium Metal Woods and the accompanying customer compensation, an increase in warranty expense, and increased manufacturing labor and overhead costs. Selling...

  • Page 21
    ...the ramp-up of golf ball operations and deferred purchase acquisition payments, partially offset by proceeds from the sale of fixed assets. Of the capital expenditures for 1999, $50.0 million were sold and leased back pursuant to terms of an equipment financing and lease agreement (see Note 4 to the...

  • Page 22
    ... and a golf venue in Las Vegas; and the re-sizing of the Company's core business to reflect current and expected business conditions. These initiatives were completed during 1999, with the exception of cash outlays related to the assignment of a lease obligation for a facility in New York City that...

  • Page 23
    ...'s brands remained number one in the U.S. and the worldwide market for woods, irons and putters in 1999. See also "Certain Factors Affecting Callaway Golf Company - Competition." Sales of the Company's Great Big Bertha Hawk Eye ® ® Titanium Metal Woods, Big Bertha ® Steelhead ™ Metal Woods and...

  • Page 24
    ... of net sales would have improved to 49% but for close-out sales of Great Big Bertha ® Tungsten•Titanium™ Irons, Great Big Bertha® and Biggest Big Bertha® Titanium Metal Woods, and Big Bertha® War Bird® Metal Woods, which had much lower margins. However, consumer acceptance of current and...

  • Page 25
    ... 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. In addition, the Company's Biggest Big Bertha® Drivers, because of their large club head...

  • Page 26
    ...number of suppliers for its club heads and shafts. In addition, some of the Company's products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. The Company believes that suitable club heads and shafts...

  • Page 27
    ...Company's professional endorsers were to stop using the Company's products contrary to their endorsement agreements, the Company's business could be adversely affected in a material way by the negative publicity. Many professional golfers throughout the world use the Company's golf clubs even though...

  • Page 28
    ... the Company's business. The Company appointed Sumitomo as the sole distributor of Callaway Golf® clubs in Japan, through a distribution agreement that ended December 31, 1999. In 1999, 1998 and 1997, sales to Sumitomo accounted for 7%, 8% and 10%, respectively, of the Company's net sales. In the...

  • Page 29
    ...reporting currency exchange rate risks. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in the value of foreign currencies. Pursuant to its foreign exchange hedging policy, beginning in January 1999, the Company may use...

  • Page 30
    ... (in thousands, except share and per share data) 1999 December 31, 1998 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net Inventories, net Deferred taxes Other current assets Total current assets Property, plant and equipment, net Intangible assets, net Other assets $ 112...

  • Page 31
    ... (in thousands, except per share data) 1999 Year ended December 31, 1998 1997 Net sales Cost of goods sold Gross profit Selling expenses General and administrative expenses Research and development costs Restructuring costs (Note 12) Sumitomo transition costs (Note 15) Litigation settlement...

  • Page 32
    ... Loss on disposal of assets Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable, net Inventories, net Other assets Accounts payable and accrued expenses Accrued employee compensation and benefits Accrued warranty expense Income taxes payable Accrued restructuring...

  • Page 33
    ...Total Current Year's Comprehensive Income Balance, December 31, 1996 Exercise of stock options Tax benefit from exercise of stock options Compensatory stock options Employee stock purchase plan Stock retirement Cash dividends Dividends on shares held by GST Adjustment of GST shares to market value...

  • Page 34
    ... in 1999. The Company designs, develops, manufactures and markets high-quality, innovative golf clubs. Callaway Golf's primary products for the periods presented include Great Big Bertha® Hawk Eye® Titanium Metal Woods, Big Bertha Steelhead ® ™ The Company's financial instruments consist...

  • Page 35
    ... related to the Employee Stock Purchase Plan are calculated by dividing the average withholdings during the period by 85% of the lower of the offering period price or the market value at the end of the period. The dilutive effect of rights to purchase preferred shares under the Callaway Golf...

  • Page 36
    ...SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the industry segment approach with the management approach. The management approach designates the international organization that is used by management for making operating decisions and assessing performance as the...

  • Page 37
    .... The Amended Credit Agreement bears interest at the Company's election at the London Interbank Offering Rate ("LIBOR") plus a margin or the higher of the base rate on corporate loans at large U.S. money center commercial banks (prime rate) or the Federal Funds Rate plus 50 basis points. The line of...

  • Page 38
    ...'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...

  • Page 39
    ... stock awards to golf professionals and other endorsers at prices that may be less than the market value of the stock at the grant date. The Directors Plan permits the granting of options to purchase shares of Common Stock to Directors of the Company who are not employees, at prices based on a non...

  • Page 40
    ...data) 1999 WeightedAverage Exercise Price Year ended December 31, 1998 WeightedAverage Exercise Price 1997 WeightedAverage Exercise Price Shares Shares Shares Outstanding at beginning of year Granted Exercised Canceled Outstanding at end of year Options exercisable at end of year Price range of...

  • Page 41
    ... of a share of the Company's 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...

  • Page 42
    ...36%- 6.24% 4.66 - 4.72% 5.64 - 5.89% 3 - 4 years 3 - 6 years 3 - 6 years The weighted-average grant-date fair value of options granted during 1999 was $3.57 per share. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting...

  • Page 43
    ... strategies. A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company's income (loss) before income taxes to the income tax provision (benefit) is as follows: (in thousands) Year ended December 31, 1999 1998 1997 Current tax provision (benefit): United...

  • Page 44
    ... for minimum lease payments under non-cancelable operating leases having initial or remaining non-cancelable terms in excess of one year as of December 31, 1999 are as follows: (in thousands) development and a golf venue in Las Vegas; and the re-sizing of the Company's core business to reflect...

  • Page 45
    ..., Callaway Golf Europe, S.A., with another of its subsidiaries, Callaway Golf Europe, Ltd. and now operates in France through a satellite office. During 1998, the Company acquired distribution rights and substantially all of the assets from its distributors in Korea, Canada, France, Belgium...

  • Page 46
    ... business combinations. Accordingly, pro forma financial information is not presented. In May 1998, the Company acquired for $4,526,000 the remaining 80% interest in All-American, which operates a nine-hole golf course, performance center, training facility and driving range located in Las Vegas...

  • Page 47
    ... balls. The Golf Clubs segment consists of Callaway Golf® titanium and stainless steel metal woods and irons, Callaway Golf® and Odyssey® putters and wedges, and sales of related accessories. The Golf Balls segment consists of golf balls that are designed and manufactured, and will be marketed...

  • Page 48
    ... FINANCIAL STATEMENTS (In thousands) 1999 9% by Ely Callaway, Chairman and Chief Executive Officer of Sales Long-Lived Assets the Company, and 81% by his son, Nicholas Callaway. CGMV was formed to produce print and other media products that relate to the game of golf. Pursuant to the agreement...

  • Page 49
    ... present fairly, in all material respects, the financial position of Callaway Golf Company and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting...

  • Page 50
    ... are traded on the New York Stock Exchange (NYSE). The Company's symbol for its Common Shares is "ELY." As of March 6, 2000, the approximate number of holders of record of the Company's Common Stock was 9,415. STOCK PRICE INFORMATION Year ended December 31, 1999 Period: High Low Dividend High 1998...

  • Page 51
    ... Nine - Dual Force - Ely Would - Enjoy the Game - ERC - Firmfeel - Great Big Bertha - Hawk Eye - HeavenWood - Hit it. Believe it. - How Golf Should Feel - Lady Hawk Eye - Little Bertha - Lyconite - Number one putter in golf - Odyssey - Odyssey Golf - Rossie - Rule 35 - Softfeel - S2H2 - Steelhead...

  • Page 52
    2285 Rutherford Road, Carlsbad, California 92008-8815 Phone: 760-931-1771