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Enjoy the game
Callaway Golf Company
2001 Annual Report

Table of contents

  • Page 1
    Enjoy the game Callaway Golf Company 2001 Annual Report

  • Page 2
    Ron Drapeau Chairman, President and Chief Executive Officer

  • Page 3
    ... state of our business. 2001 was a year of challenges for our Company, challenges met and managed. We started the year with a great deal of enthusiasm, and with good reason. As the recognized technology leader and innovator, we had developed the ERC II Forged Titanium Driver, the best driver we ever...

  • Page 4
    ...accounting rules. I urge each shareholder to read the complete disclosure on this subject in the financial section of this report. As we analyze our sales for the year, I am proud to report to you that in the United States we have maintained our number one market share position in metal woods, irons...

  • Page 5
    .... In our newly created Product Management Structure we have appointed four key officer positions that have responsibility for the life cycle profitability of our products in woods, irons & putters, balls, and licensing & accessories. These individuals, working through a matrix organization, have...

  • Page 6
    ... some of our authorized retailers who are head professional golfers at major golf courses in the U.S., Canada, Europe and Australia. These Fitting Solutions use sophisticated computer-assisted technology, developed in concert with IBM, to custom fit our irons and woods. We believe this strategy will...

  • Page 7
    ... the past. Callaway Golf balls have quickly become number 2 on the professional tours and with amateur golfers in their price categories at retail. In addition to these exciting new products, we will introduce in North America and Europe in 2002 the first collection of apparel from our license with...

  • Page 8
    ... we should all be working together to grow this wonderful game, not stifle it. However, we do not control the process. In fact, like other manufacturers, golf course operators, retailers, instructors, professional tours, etc., we have almost no input into the process. But the little input we do have...

  • Page 9

  • Page 10
    Callaway Golf Company Financial Highlights (in thousands, except per share data) 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 (1) (2) 2001 $ $ $ $ $ $ 2000 1999 85,497 ...

  • Page 11
    Callaway Golf Company Net Sales (in millions) $849 $838 $816 $719 $703 $684 $557 $452 $58 Net Income (Loss) (in millions) $133 $122 $98 $81 $78 $55 $43 $256 $133 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 $19 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 $(27) 9

  • Page 12
    Ely Callaway 1919-2001

  • Page 13
    ... make golf clubs and golf balls that were the most forgiving in the history of the game - and he succeeded. For all who play with Callaway Golf clubs and balls, scores and handicaps vary but the essential reward is always the same - the pleasing sensation of those well struck shots. It's what brings...

  • Page 14

  • Page 15
    Down by one, ripped an iron from under a tree, hit the green - won it.

  • Page 16
    This one putt from the fringe. 20 feet down a slope, right, then left , dropped like a sinker.

  • Page 17

  • Page 18
    ... in golf club design. The driver, once the most-feared and least-used club in golfers' bags, was transformed into the most fun - because of Big Bertha. The fun and forgiveness Callaway Golf brought to drivers has since spread throughout the bag, from fairway woods and irons to putters and golf balls...

  • Page 19
    ... of Odyssey Putters. Sales reach $848.9 million. 1998 The Big Bertha X-12 Irons become the biggest product launch to date for the Company, selling 100,000 sets within three weeks of introduction. Ground is broken for Callaway Golf ball plant. Sales are $703.1 million despite golf industry slowdown...

  • Page 20
    ...of the "titanium age" in metal wood design. Callaway Golf's production expertise allows the Company to embrace titanium club design before most other golf club manufacturers. 1996 Great Big Bertha Titanium Fairway Woods bring titanium to the fairway wood market. Big Bertha Tour Series Wedges are the...

  • Page 21
    .... Hawk Eye VFT Titanium Irons enhance the titanium iron category. CTU 30 Blue and Red golf balls replace the Rule 35 balls, using an improved aerodynamic design. The Odyssey White Hot "2-Ball" Putter is introduced to rave reviews. 2002 The largest line of new products ever includes the Big Bertha...

  • Page 22
    ... go public and offer shares on the NYSE. The Big Bertha Driver scores its first tour win by Don Bies on the Senior PGA Tour. 1993 Callaway Golf Foundation is founded; has since made $5 million in grants to charities. Johnny Miller wins the AT&T Pebble Beach National Pro-Am using Callaway Golf clubs...

  • Page 23
    ...win the U.S. Women's Open. 1999 The Robb Repor t honors Callaway Golf as "Best of the Best" in golf clubs. Golfweb.com names the Great Big Ber tha Hawk Eye Titanium Driver the best driver of the year. Bruce Fleisher uses Callaway Golf clubs to win his first two events on the Senior PGA Tour. 2000...

  • Page 24
    Wiped his silly smirk off from 175 yards.

  • Page 25

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  • Page 27
    A little fade shot that smacked the stick. Made the putt, too.

  • Page 28
    All square on 18 and she chips in for birdie. I still say it was luck.

  • Page 29
    ... 44 Reports of Independent Public Accountants 57 Change in Independent Public Accountants 58 Summarized Quarterly Financial Data (Unaudited) 58 Market for Common Shares and Related Shareholder Matters 59 Corporate Data 59 Board of Directors and Senior Officers 60 On the cover: Callaway Golf Staff...

  • Page 30
    Callaway Golf Company Selected Financial Data(1) (in thousands, except per share data) Year ended December 31, 2001 Statement of Operations Data: Net sales Cost of sales Gross profit Selling, general...31, 2001 Balance Sheet Data: Cash and cash equivalents Marketable securities Working capital Total...

  • Page 31
    ..., Great Big Bertha Hawk Eye Metal Woods and ERC Forged Titanium Drivers, respectively. The increase in golf ball sales of $20.9 million (62%) to $54.9 million was primarily due to the introduction of the CB1 and CTU 30 golf balls during 2001. Sales of putters, accessories and other products...

  • Page 32
    ..., golf balls and other products, including putters and accessories, partially offset by a decrease in sales of metal woods. The increase in sales of irons of 40% to $299.9 million represents an increase in both unit and dollar sales and is primarily attributable to sales of Great Big Bertha Hawk Eye...

  • Page 33
    ... with the launch of the Company's Rule 35 golf balls and with expanded golf club sales activity in the Company's Japanese subsidiary. Prior to 2000, Callaway Golf products were sold in Japan through a third party distributor. Expenses related to product endorsement also contributed to the increase...

  • Page 34
    ...-priced, fixed-capacity, energy supply contract ("Enron Contract") with Enron Energy Services, Inc. ("EESI"), a subsidiary of Enron Corporation, as part of a comprehensive strategy to ensure the uninterrupted supply of electricity while capping costs in the volatile California electricity market...

  • Page 35
    ...to cover its costs and become profitable in 2002. Although the Company's golf ball operations have shown significant improvement during 2001, there is no assurance that the Company will be able to achieve the sales or production efficiencies necessary to make its golf ball business profitable. Until...

  • Page 36
    ... ball designs that directly compete with the Company's products, and several manufacturers in Japan have announced their plans to expand their businesses in the United States. Furthermore, as competition in this business increases, many of these competitors are discounting substantially the prices...

  • Page 37
    ... the game of golf as well, the strategy proved to be risky. The USGA vigorously and openly opposed the sale or use of the ERC II Driver. On December 8, 2000, the USGA announced that scores in rounds played with clubs that do not conform to USGA rules, such as the ERC II Forged Titanium Driver, may...

  • Page 38
    ... golfers in order to evaluate and promote Callaway Golf and Odyssey branded products. The Company has entered into endorsement arrangements with members of the various professional tours, including the Senior PGA Tour, the PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf Tour...

  • Page 39
    ... half of 2001 there was unusually adverse weather, which affected retail sales of the Company's products and made the Company's customers reluctant to re-order in quantity. Product Returns Golf Clubs. The Company supports all of its golf clubs with a limited two year written warranty. Since the...

  • Page 40
    ... based on quoted market prices or pricing models using current market rates, and records all derivatives on the balance sheet at fair value. At December 31, 2001 and 2000, the net fair value of foreign currency-related derivatives designated as cash flow hedges or fair value hedges were recorded...

  • Page 41
    ...Total current assets Property, plant and equipment, net Intangible assets, net Deferred taxes Other assets Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses Accrued employee compensation and benefits Accrued warranty expense Note payable, current portion...

  • Page 42
    Callaway Golf Company Consolidated Statements of Operations (in thousands, except per share data) Year ended December 31, Net sales Cost of sales Gross profit Selling expenses General and administrative expenses Research and development expenses Restructuring credits Sumitomo transition expenses ...

  • Page 43
    ...Deferred taxes Non-cash restructuring costs 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...

  • Page 44
    Callaway Golf Company Consolidated Statements of Shareholders' Equity (in thousands) Balance, December 31, 1998 Exercise of stock options Tax benefit from exercise of stock options Cancellation of Restricted Common Stock Compensatory stock and stock options Employee stock purchase plan Cash ...

  • Page 45
    Callaway Golf Company $ $ Unearned Compensation (5,653) - - 684 2,185 2,784) - - 217 - 1,...,744 4,969) - - - - (98,713) 2,375 - - - - 3,374 - - - (90,282) (22,898) - - - (206,144) Shares 4,815 4,815) - - - (6,001) - - 40 - - 5,837 - - - - (4,939) Treasury Stock Amount 80,469 80,469) - - - ...

  • Page 46
    ...Woods, ERC and ERC II Forged Titanium Drivers, Big Bertha Steelhead Plus and Big Bertha Steelhead Metal Woods, Great Big Bertha Hawk Eye and Great Big Bertha Hawk Eye VFT Tungsten Injected Titanium Irons, Steelhead X14 and Big Bertha X-12 Irons, Odyssey putters and wedges, Rule 35 and CB1 golf balls...

  • Page 47
    ... securities 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...

  • Page 48
    ... to earnings during 2001 as a result of discontinuance of any cash flow hedges. Segment Information The Company utilizes the management approach to report segment information. The Company's operating segments are organized on the basis of products and include golf clubs and golf balls. The Company...

  • Page 49
    ... over periods ranging from five to 40 years follow the non-amortization approach effective January 1, 2002. Other intangible assets with indefinite lives include trademark, trade name and trade dress. At December 31, 2001, the carrying value of unamortized goodwill and other intangible assets...

  • Page 50
    ... 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 Amended Credit Agreement requires the Company to maintain certain minimum financial ratios, including...

  • Page 51
    ...near-term market quotations and other market information to determine fair value estimates. In management's opinion, contract valuation models do not necessarily provide a reliable single measure of the fair value of the energy derivative because there are no quoted market rates directly relevant to...

  • Page 52
    .... The 2001 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 the market value of the stock at the date of grant. Grantor Stock Trust In July 1995, the Company established the Callaway Golf Company...

  • Page 53
    Callaway Golf Company The following table presents shares authorized, available for future grant and outstanding under each of the Company's plans as of December 31, 2001: (in thousands) 1991 Plan Promotion Plan 1995 Plan 1996 Plan 1998 Plan Key Officer Plans 2001 Directors Plan Directors Plan ...

  • Page 54
    ... granted in future years. The fair value of employee stock options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, Dividend yield Expected volatility Risk free interest rates Expected lives 2001 1.6% 53.9% 3.81...

  • Page 55
    ...000, $6,806,000 and $2,377,000, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in paid-in capital. $ $ $ U.S. tax return examinations have been completed for the years through 1994. Management believes adequate provisions for income tax have been...

  • Page 56
    ... the Company to use a number of Bridgestone's three piece golf ball patents worldwide. As a result of the license agreement, the U.S. Action and Japan Action were dismissed. 54 Vendor Arrangements The Company is dependent on a limited number of suppliers for its clubheads and shafts, some of which...

  • Page 57
    ... include golf clubs and golf 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 related accessories. The Golf Balls segment consists of golf balls that are designed, manufactured, marketed and...

  • Page 58
    ...the United States, Canada, Europe, Australia, New Zealand and South Africa. In addition, the Company also entered into a long-term licensing agreement with Sanei International Co., Ltd. to create and sell Callaway Golf apparel in Japan. The Company's golf apparel products will be available at retail...

  • Page 59
    ... present fairly, in all material respects, the financial position of Callaway Golf Company and Subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United...

  • Page 60
    ... matter of the disagreement in connection with its reports. Summarized Quarterly Financial Data (Unaudited) (in thousands, except per share data) Fiscal Year 2001 Quarters Net sales Gross profit Net income (loss) Earnings (loss) per common share (1) Basic Diluted $ $ $ $ $ 1st 261,365 136,907 34...

  • Page 61
    ... Nine - Dual Force - Enjoy the Game - ERC - ERC II - Ely Would - Ginty - Great Big Bertha - HX - Hawk Eye - Heavenwood - Ladies' Gems - Little Bertha - Odyssey - RCH - Rossie - Rule 35 - S2H2 - Steelhead - Steelhead Plus - Stronomic - TriForce - TriHot - Tru Bore - Tubular Lattice Network - Tungsten...

  • Page 62
    ... and Public Relations Michael J. Galeski Senior Vice President, Sports Marketing Geoffrey P.M. Goodman Senior Vice President, Product Management Donna L. Kaptain Senior Vice President, Human Resources Darian C. Pasterski Senior Vice President, Information Technology and Chief e-Business Officer...

  • Page 63
    Charles Howell III, 2001 PGA Tour Rookie of the Year

  • Page 64
    Annika Sorenstam, 2001 LPGA Tour Player of the Year