Callaway 2002 Annual Report Download

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CALLAWAY GOLF COM PANY 2 0 02 ANNUAL REPORT

Table of contents

  • Page 1
    CALLAW AY GOLF COM PAN Y 2002 AN N UAL REPORT

  • Page 2
    - E LY CALLAW AY

  • Page 3
    ... titanium-tungsten and the classic look of forged steel wedges. Aerospace technology makes our fly far and land soft and when they get on the green, - the product of the year in golf - and an array of Odyssey putters help you even the score. Golfers will now look great feel great, and hit...

  • Page 4
    C A LLAWAY G O LF C O M PA N Y 1

  • Page 5
    ... non-cash adjustments - one that was negative in 2001 (energy supply contract) and one that was positive in 2002 (warranty reserve reversal). For additional information regarding these adjustments and their effects on net income and earnings per diluted share, I encourage you to read Management...

  • Page 6
    ...use "pro forma" reporting sparingly, and only when it clarifies - rather than obscures - understanding of our real operations. For example, in 2001 accounting rules required that we take a non-cash charge associated with the unused portion of a long-term energy supply agreement, and accounting rules...

  • Page 7
    ... new Great Big Bertha II Titanium Driver and Fairway Woods, new Steelhead X-16 Irons (replacing the X-14 Irons) in both regular (offset) and Pro Series (less offset) models, new models of White Hot Putters that incorporate the features of the highly successful 2-Ball Putter, and new line of Odyssey...

  • Page 8
    C A LLAWAY G O LF C O M PA N Y 5

  • Page 9
    6 C A LLAWAY G O LF C O M PA N Y

  • Page 10
    ...very short time, achieved phenomenal penetration on the professional tours and positive reviews from expert and amateur golfers alike. Moreover, we continue to increase our sales and our market share. But the ball business continues to lose money. Factors that hold us back include the large start-up...

  • Page 11
    ... is good business. We p ro t e c t our brand to assure that it accurately communicates to the world our core values, goals and beliefs. We strive to produce profits that can be used to fund breakthrough innovations, reward superior performance by our employees, and generate excellent returns for...

  • Page 12
    ... la t e d Sh a re h old e r Ma t t e rs 71 Corp ora t e Da t a 73 Ou r Corp ora t e Cit ize n s h ip 74 Boa rd of Dire c t ors a n d Se n ior Offic e rs 75 76 An n ika Sore n s t a m C A L L A WA Y G O L F C O M P A N Y 9

  • Page 13
    ... cash equivalents Marketable securities Working capital Total assets Long-term liabilities Total shareholders' equity (1) For 2002, the Company's gross profit, net income and earnings per common share include the effect of the change in accounting estimate for the Company's warranty accrual. During...

  • Page 14
    ... accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements: Revenue Recognition Sales are recognized when both title and risk of loss transfer to the customer. Sales are recorded net of an allowance for sales returns...

  • Page 15
    ... and explicit warranty obligation was to utilize data and information based on the cumulative failure rate by product after taking into consideration specific risks the Company believes existed at the time the financial statements were prepared. These additional risks included product-specific risks...

  • Page 16
    ... in sales of putters, a $11.1 million (20%) increase in sales of golf balls, and a $9.1 million (18%) increase in sales of accessories and other products as compared to 2001. The decrease in net sales of woods was expected due to the Company's natural product life cycles with higher priced titanium...

  • Page 17
    ... offset by the sales generated from the January 2002 introduction of Big Bertha Steelhead III Woods, the February 2002 introduction of Big Bertha C4 Drivers, and the September 2002 introduction of the Great Big Bertha II Titanium Drivers and Fairway Woods. The $5.4 million (2%) decrease in net sales...

  • Page 18
    ...offset by a lower average selling price for golf club products combined with close-out pricing for discontinued Rule 35 golf ball products and a price reduction on all golf ball products implemented in August 2002, additional inventory reserves established on ERC II Drivers and Big Bertha C4 Drivers...

  • Page 19
    ... (see above "Change in Accounting Estimate"). Net income in 2001 was negatively impacted by the $19.9 million energy derivative charge (see below "Supply of Electricity and Energy Contracts"). Excluding the $17.0 million non-cash warranty reserve adjustment recorded in 2002 and the $19.9 million...

  • Page 20
    ...2000 exchange rates to 2001 net sales. Net sales information by product category is summarized as follows: For the Ye ars En de d De ce m be r 31, (In m illions) Grow th/ (De clin e ) 2001 2000 Dollars Percent Net Sales: Driver and fairway woods $ 392.9 Irons Putters Golf balls Accessories and...

  • Page 21
    ... to increased sales of the Company's golf bags in 2001. Net sales information by region is summarized as follows: For the Ye ars En de d De ce m be r 31, (In m illions) mix away from lower yielding iron products to higher yielding wood products. Golf ball product profit margins improved during...

  • Page 22
    ... after-tax or $0.20 per diluted share, as a result of the change in estimated market value of the Company's energy supply contract (see below "Supply of Electricity and Energy Contracts"). Excluding this non-cash energy supply contract charge, the Company's net income for 2001 as compared to 2000...

  • Page 23
    ...which offers longer payment terms, among other incentives, for retailers who participate in the program in exchange for providing certain benefits to the Company, including the maintenance of agreed upon inventory levels, prime product placement and retailer staff training. At December 31, 2002, the...

  • Page 24
    ... to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and...

  • Page 25
    ... Affecting Callaway Golf Company - Golf Professional Endorsements." During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property...

  • Page 26
    ... 9, 2002 proposal is to leave the COR limitations for driving clubs unchanged in the United States. The Company had planned for this contingency, and has developed new driver products for sale in USGA jurisdictions that conform to this limit (e.g., Great Big Bertha II Titanium Drivers). In addition...

  • Page 27
    ... 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. The Enron Contract provided, subject to the other terms and conditions of...

  • Page 28
    ... Company's sales to retailers at resorts and other vacation destinations would be materially adversely affected. A dverse Global Econom ic Conditions The Company sells golf clubs, golf balls and golf accessories. These products are recreational in nature and are therefore discretionary purchases for...

  • Page 29
    ... exchange rates may positively or negatively affect the Company's financial results. Overall, the Company is generally negatively affected by a stronger U.S. dollar in relation to the foreign currencies in which the Company conducts business. Conversely, overall, the Company is generally positively...

  • Page 30
    ... the Company could engage alternative suppliers to deliver its products in a timely and cost-efficient manner. In addition, many of the components the Company uses to build its golf clubs, including clubheads and shafts, are shipped to the Company via air carrier and ship services. Any significant...

  • Page 31
    ... to be competitive, there can be no assurance that successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors will not negatively impact the Company's future sales. golfers, including a golf club's and golf ball's look...

  • Page 32
    ... Great Big Bertha II+ Titanium Drivers will not be conforming in certain competitions involving highly skilled golfers and effective January 1, 2008 such drivers would not be conforming under the Rules of Golf as published by the R&A. These new R&A restrictions could affect current and future sales...

  • Page 33
    ... golf balls, have focused a great deal of their marketing efforts on promoting the fact that tour professionals use their balls. Some of these golf ball competitors spend large amounts of money to secure professional endorsements and/or usage, and the market leader has obtained a very high degree...

  • Page 34
    ...high incidence of breakage or other warranty problems in excess of these reserves, the Company's financial results could be adversely affected. See above, "Critical Accounting Policies and Estimates - Warranty." Golf Balls. The Company has not experienced significant returns of defective golf balls...

  • Page 35
    ... markets in Europe, Asia, North America and elsewhere around the world. These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate infrastructure and facilities. In addition, there are a limited number of suppliers of golf club...

  • Page 36
    ... risk which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated. The Company also utilized a derivative commodity instrument, the Enron Contract, to manage electricity costs in the volatile California energy market during the period of...

  • Page 37
    ... instrument are evaluated using the same spot rate, the Company anticipates the hedges to be highly effective. The effectiveness of each derivative is assessed quarterly. At December 31, 2002, 2001 and 2000, the notional amounts of the Company's outstanding foreign exchange contracts used to hedge...

  • Page 38
    ... its balance sheet, subject to periodic review, in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." See above "Supply of Electricity and Energy Contracts." Interest Rate Fluctuations Additionally, the Company is exposed to...

  • Page 39
    Th e Wo rld 's #1 Go lf Clu b Co m p a n y To date...o v e r $ 6.9 Billio n worth of Callaway Golf products have been sold. 36 C A L L A WA Y G O L F C O M P A N Y

  • Page 40
    ..., except share and per share data) 2002 2001 ASSETS Current assets: Cash and cash equivalents Marketable securities Accounts receivable, net Inventories, net Deferred taxes Other current assets Total current assets Property, plant and equipment, net Intangible assets, net Goodwill Deferred...

  • Page 41
    ...sales Gross profit Selling expenses General and administrative expenses Research and development expenses Total operating expenses Income from operations Interest and other income, net Interest expense Unrealized energy derivative losses Income before income taxes and cumulative effect of accounting...

  • Page 42
    ... gains Net gains from sale of marketable securities Deferred taxes 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 43
    ... stock purchase plan Cash dividends Dividends on shares held by Grantor Stock Trust Adjustment of Grantor Stock Trust shares to market value Equity adjustment from foreign currency translation Unrealized loss on cash flow hedges, net of tax Unrealized loss on marketable securities, net of tax Net...

  • Page 44
    ... Trust $ (93,744 4,969 98,713) 2,375 - - - - 3,374 - - - (90,282) (22,898) - - - $ (206,144) 2,950 - - - 7,869 - - 61,119 - - - - $ (134,206) Shares - - - - Treasury Stock Amount $ - - - - (80,469 80,469) - - - (104,049) - - 645 - - 99,999 - - - - $ (83,874) - - (46,457 130,331) Total $ 499...

  • Page 45
    ... Tungsten Injected Titanium Irons, Steelhead X-14 and Big Bertha Irons, Odyssey putters and wedges, Callaway Golf wedges, golf balls, golf bags and other golf accessories. The golf ball product line includes the Rule 35, CB1, CTU 30, HX, HX 2Piece, and Warbird golf balls. using the purchase method...

  • Page 46
    ...as a change in accounting principle inseparable from a change in estimate (Note 3). Fair Value of Financial Instrum ents The Company's financial instruments consist of cash and cash equivalents, marketable securities, trade receivables and payables, forward foreign currency exchange contracts (Note...

  • Page 47
    ... as part of a comprehensive strategy to ensure the uninterrupted supply of electricity while capping electricity costs in the volatile California energy market. Additional information about the Company's use of derivative instruments is presented in Notes 7 and 12. Earnings Per Com m on Share Basic...

  • Page 48
    ... share by $0.02, $0.03 and $0.01 for the years ended December 31, 2002, 2001 and 2000, respectively. In August 2002, the Company purchased previously leased manufacturing equipment utilized in the Company's golf ball operations. In December 1998, the Company entered into a master lease agreement...

  • Page 49
    ... other employee stock-based awards were granted with an exercise price equal to the market value of the underlying common stock on the date of grant and no compensation cost is reflected in net income from operations for those awards. Pro forma disclosures of net income and earnings per share, as...

  • Page 50
    ...to report segment information. The Company's operating segments are organized on the basis of products and consist of Golf Clubs and Golf Balls. The Golf Clubs segment primarily consists of Callaway Golf titanium and stainless steel metal woods and irons, Callaway Golf and Odyssey putters and wedges...

  • Page 51
    ...general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support...

  • Page 52
    ... and explicit warranty obligation was to utilize data and information based on the cumulative failure rate by product after taking into consideration specific risks the Company believes existed at the time the financial statements were prepared. These additional risks included product specific risks...

  • Page 53
    ...: Land Buildings and improvements Machinery and equipment Furniture, computers and equipment Production molds Construction-in-process Accumulated depreciation $ Accounts payable and accrued expenses: Accounts payable Accrued expenses Accrued sales programs Accrued employee compensation and benefits...

  • Page 54
    ...subject an the annual December 31, 2002 Accumulated Net Book Amortization Value $ - - 5,699 $ 5,699 $ 62,013 26,577 14,525 $ 103,115 December 31, 2001 Accumulated Net Book Amortization Value $ 7,616 3,264 6,190 $ 17,070 $ 62,013 26,577 15,877 $104,467 (In thousands) Useful Life (Years) Gross $ 62...

  • Page 55
    ...a t iv e s a n d He d g in g The Company uses derivative financial instruments to manage its exposures to foreign exchange rates. The Company also utilized a derivative commodity instrument to manage its exposure to electricity rates in the volatile California energy market during the period of June...

  • Page 56
    ... and comply with established risk management policies. Pursuant to its foreign exchange hedging policy, the Company may hedge anticipated transactions and the related receivables and payables denominated in foreign currencies using forward foreign currency exchange rate contracts and put or call...

  • Page 57
    ...the Company entered into a long-term, fixed-price, fixed-capacity, energy supply contract as part of a comprehensive strategy to ensure the uninterrupted supply of electricity while capping costs in the volatile California e le c tricity market. The contract was originally effective through May 2006...

  • Page 58
    ... 2000, August 2001 and May 2002, the Company announced that its Board of Directors authorized it to repurchase its Common Stock in the open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities from time to time, up to a maximum cost to...

  • Page 59
    ...In July 1995, the Company established the Callaway Golf Company Grantor Stock Trust (the "GST") for the purpose of funding the Company's obligations with respect to one or more of the Company's non-qualified or qualified employee benefit plans. The GST shares are used primarily for the settlement of...

  • Page 60
    ... upon a non-employee Director's initial appointment to the Company's Board of Directors and annually on the anniversary of such appointment. All such grants are made at prices based on the market value of the stock at the date of grant. The following table presents shares authorized, available...

  • Page 61
    ... 2.50 - $ 40.00 The exercise price of all options granted during 2002 was equal to the market value on the date of grant. The following table summarizes additional information about outstanding stock options at December 31, 2002: Weighted-Average Remaining Contractual Life-Years 1.92 5.28 6.92 2.39...

  • Page 62
    ... 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 63
    ... 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...

  • Page 64
    ... upon retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase Company-owned life insurance. The cash surrender value of the Company-owned insurance related to deferred compensation is included in other assets and was...

  • Page 65
    ... Enron Energy Services, Inc. ("EESI"), a subsidiary of Enron Corporation, as part of a comprehensive strategy to ensure the uninterrupted supply of energy while capping electricity costs in the volatile California energy market. The Enron Contract provided, subject to the other terms and conditions...

  • Page 66
    ... 2002, Callaway Golf Sales Company was served with a complaint filed in the District Court of Sedgwick County, Kansas, Case No. 0203607, seeking to assert an alleged class action on behalf of Kansas consumers who purchased select Callaway Golf products covered by the New Product Introduction Policy...

  • Page 67
    ... a limited number of suppliers for its clubheads and shafts, some of which are single-sourced. 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...

  • Page 68
    ... to report segment information. The Company's operating segments are organized on the basis of products and include Golf Clubs and Golf Balls. The Golf Clubs segment consists primarily of Callaway Golf titanium and stainless steel metal woods and irons, Callaway Golf and Odyssey putters and wedges...

  • Page 69
    ... and amortization Golf Clubs Golf Balls assets (2) $ (1) Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability. (2) Identifiable assets are comprised of net inventory, property, plant and...

  • Page 70
    ..., 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 and makes grants to carefully selected organizations. Directors and executive officers of...

  • Page 71
    ... of 2002, the Company reduced its warranty reserve by approximately $17,000,000, pre-tax (Note 3). (3) The Company's net income and earnings per common share include the recognition of unrealized energy contract losses due to changes in the estimated fair value of the energy contract based on market...

  • Page 72
    ...of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed above, the consolidated financial statements of Callaway Golf Company and subsidiaries as of December 31, 2001, and for the year...

  • Page 73
    ... and cash flows of Callaway Golf Company and its subsidiaries for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to...

  • Page 74
    ...'s initial public offering, and the Committee was aware of the view that companies should periodically bring in a "fresh" auditor to review its accounting practices. Management solicited proposals from likely candidates, and during the second quarter of 2001 the Audit Committee reviewed a number of...

  • Page 75
    ...consultation with the staff of the Securities and Exchange Commission, management and KPMG could not reach agreement on a proper accounting treatment. The Audit Committee and the Audit Committee Chairman reviewed the matter with management and KPMG on several occasions, both informally and at formal...

  • Page 76
    ... Odyssey Putters • Callaway Golf and Odyssey accessories • Callaway Golf apparel • Callaway Golf tour player profiles, stats and news • Corporate information, financial reports & news releases • Customer Service • International locations and news Or call our Investor Relations Department...

  • Page 77
    ... Company has implemented a series of innovative programs to give back to the communities in which our employees live and work and in which the Company conducts business. In 2002 the Company demonstrated it's corporate citizenship in Callaway Golf continues to support a number of key initiatives that...

  • Page 78
    ... Vice President, Global Press and Public Relations, Chrmn. Callaway Golf Foundation Ve rn on E. Jordan , Jr. Senior Managing Director, Lazard Freres and Co., LLC Michae l J. Gale s ki Senior Vice President, Sports Marketing Yotaro Kobay as hi Chairman of the Board, Fuji Xerox Co., Ltd. Ge offre...

  • Page 79
    a n n ik a s o re n s t a m The World's #1 Woman Golfer Younge st Ha ll of Fa me me mbe r in LPGA history Se t or tie d 50 LPGA Tour re cords in la st tw o ye a rs Winne r of 42 LPGA Tourna me nts since turning pro Won 13 time s a round the globe in 2002 Only w oma n in history to...

  • Page 80

  • Page 81
    ''From the beginning, our goal has been to please, reward and satisfy average golfers around the world by making golf products that are truly superior to those of our competition. That will never change." - Ro n Dra p e a u C A L L A WA Y G O L F C O M P A N Y 1

  • Page 82