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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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Commission file number 1-10962 |
Callaway Golf Company
(Exact name of registrant as specified in its charter)
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Delaware |
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95-3797580 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
2180 Rutherford Road
Carlsbad, CA 92008
(760) 931-1771
(Address, including zip code, and telephone number, including
area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange on which registered |
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Common Stock, $.01 par value per share
Preferred Share Purchase Rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
As of June 30, 2004, the aggregate market value of the
Registrant’s Common Stock held by nonaffiliates of the
Registrant was $764,936,593 based on the closing sales price of
the Registrant’s Common Stock as reported on the New York
Stock Exchange. Such amount was calculated by excluding all
shares held by directors and executive officers and the
Company’s grantor stock trust without conceding that any of
the excluded parties are “affiliates” of the
Registrant for purposes of the federal securities laws.
As of February 28, 2005, the number of shares of the
Registrant’s Common Stock outstanding was 76,289,277, and
there were no shares of the Registrant’s Preferred Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and III incorporate certain information by
reference from the Registrant’s Definitive Proxy Statement
to be filed with the Commission pursuant to Regulation 14A
in connection with the Registrant’s 2005 Annual Meeting of
Shareholders, which is scheduled to be held on May 24,
2005. Such Definitive Proxy Statement will be filed with the
Commission not later than 120 days after the conclusion of
the Registrant’s fiscal year ended December 31, 2004.
Important Notice to Investors: Statements made
in this report that relate to future plans, events, liquidity,
financial results or performance including statements relating
to future cash flows, as well as estimated charges to earnings,
projected amortization expenses and contractual obligations, are
forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995. These statements are
based upon current information and expectations. Actual results
may differ materially from those anticipated as a result of
certain risks and uncertainties. For details concerning these
and other risks and uncertainties, see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Certain Factors Affecting Callaway Golf
Company” contained in this report, as well as the
Company’s other reports on Forms 10-K, 10-Q and 8-K
subsequently filed with the Securities and Exchange Commission
from time to time. Investors 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
update forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events. Investors should also be aware that
while the Company from time to time does communicate with
securities analysts, it is against the Company’s policy to
disclose to them any material non-public information or other
confidential commercial information. Furthermore, the Company
has a policy against distributing or confirming financial
forecasts or projections issued by analysts and any reports
issued by such analysts are not the responsibility of the
Company. Investors should not assume that the Company agrees
with any report issued by any analyst or with any statements,
projections, forecasts or opinions contained in any such
report.
Callaway Golf Company Trademarks: The following
marks and phrases, among others, are trademarks of Callaway Golf
Company: Apex — Apex Edge — Apex
Tour — Baby Ben — Ben Hogan —
BH — BH-5 — Big Ben — Big
Bertha — C design — C455 —
CB1 — CS-3 — CTU 30 —
Callaway — Callaway Golf — Callaway Hickory
Stick — Carnoustie — Chevron
Device — Complete — Dawn Patrol —
Daytripper — Demonstrably Superior and Pleasingly
Different — Deuce — DFX — Distance
Yourself — Divine Nine — Dual
Force — Dual Zone — Edge CFT — Ely
Would — ERC — Ever Grip —
Explosive Distance.Amazing Soft Feel — Flying
Lady — FTX — Fusion — Game
Enjoyment System — Gems — GES —
Ginty — Great Big Bertha — Hawk
Eye — Heavenwood — Hogan —
HX — I-Trax — Legacy —
Legend — Little Bertha — Long &
Soft — Molitor — Number One Putter in
Golf — Odyssey — Pure Distance —
RCH — Riviera — Rossie —
Rule 35 — S2H2 — STS —
SenSert — Speed Slot — Steelhead —
Strata — Stronomic — Sure-Out — T
design — The Hawk — The Longest
Balls — The Most Played Name in Golf — TL
Distance — TL Tour — Top-Flite —
Top-Flite Infinity — Top-Flite Tour —
Top-Flite XL — Tour Ace — Tour
Blue — Tour Deep — Tour Premier —
Tour Professional — Tour Straight — Tour
Ultimate — Trade In! Trade Up! —
TriForce — TriHot — Trilateral —
Tru Bore — Tunite — VFT —
Warbird — Where They Don’t Play Golf, They
Don’t Play Top-Flite — White Hot —
White Steel — World’s Friendliest —
X-12 — X-14 — X-16 —
X-18 — XL 3000 — X-SPANN —
X-Tour — XWT
CALLAWAY GOLF COMPANY
INDEX
PART I
Callaway Golf Company (the “Company” or “Callaway
Golf”) was incorporated in California in 1982 and
reincorporated in Delaware on July 1, 1999. In 1997, the
Company acquired substantially all of the assets of Odyssey
Sports, Inc., which manufactured and marketed the Odyssey brand
of putters and wedges. In 1998, the Company began a
reorganization of its international operations by acquiring the
distribution rights in certain key international markets. As a
result, during 1998 through 2001, the Company acquired
distribution rights and substantially all of the assets from its
distributors in Japan, France, Belgium, Norway, Denmark,
Germany, Japan, Ireland, Spain, Canada, Korea and Australia. In
2000, the Company entered the golf ball business with the
release of its first golf ball product. In 2003, the Company
acquired through a court-approved sale substantially all of the
golf-related assets of the TFGC Estate Inc. (f/k/a The Top-Flite
Golf Company, f/k/a Spalding Sports Worldwide, Inc.), which
included golf ball manufacturing facilities, the Top-Flite and
Ben Hogan brands, and all golf-related patents and trademarks
(the “Top-Flite Acquisition”). Beginning in 2001, the
Company and its participating retailers partnered with
FrogTrader to develop the Trade In! Trade Up! program. In 2004,
the Company acquired all of the issued and outstanding shares of
stock of FrogTrader, Inc. (which subsequently changed its name
to Callaway Golf Interactive, Inc.). The Company acquired
FrogTrader to stimulate purchases of new clubs by growing its
Trade In! Trade Up! program and to enable the Company to better
manage the distribution of pre-owned golf clubs and the Callaway
Golf brand. The Company currently has the following wholly-owned
operating subsidiaries: Callaway Golf Sales Company, The
Top-Flite Golf Company, Callaway Golf Interactive, Inc.,
Callaway Golf Europe Ltd., Callaway Golf K.K., Callaway Golf
Korea Ltd., Callaway Golf Canada Ltd. and Callaway Golf South
Pacific PTY Ltd.
The Company, together with its subsidiaries, designs,
manufactures and sells high quality golf clubs (drivers, fairway
woods, irons, wedges and putters) and golf balls. The Company
also sells golf accessories such as golf bags, golf gloves, golf
headwear, travel covers and bags, golf towels and golf
umbrellas. In some markets outside of the United States, the
Company’s subsidiaries also sell footwear. The Company
generally sells its products to golf retailers, sporting goods
retailers and mass merchants, directly and through its
wholly-owned subsidiaries, and to third party distributors. The
Company also sells pre-owned golf products through its website,
www.callawaygolfpreowned.com. The Company’s products
are sold in the United States and in over 100 countries around
the world. The Company’s products are designed for the
enjoyment of both amateur and professional golfers. Golfers
generally purchase the Company’s products on the basis of
performance, ease of use and appearance. In addition, the
Company licenses its trademarks and service marks in exchange
for a royalty fee to third parties for use on products such as
golf apparel, golf shoes, watches, luggage and other golf
related products such as headwear, travel bags, golf towels and
golf umbrellas. The Company’s business is seasonal and as a
result approximately two-thirds of its sales occur during the
first half of its fiscal year (see below “Certain Factors
Affecting Callaway Golf Company — Seasonality and
Adverse Weather Conditions” contained in Item 7).
Financial Information about Segments and Geographic Areas
Information regarding the Company’s segments and geographic
areas in which the Company operates is contained in Note 14
to the Company’s Consolidated Financial Statements for the
years ended December 31, 2004, 2003 and 2002
(“Consolidated Financial Statements”), which note is
incorporated herein by this reference and is included as part of
“Item 8. Financial Statements and Supplementary
Data” to this Form 10-K.
Products
The Company designs, manufactures and sells high quality golf
clubs and golf balls and also sells related accessories. In some
markets outside the United States the Company’s
subsidiaries also sell footwear. The Company designs its
products to be technologically-advanced and in this regard
invests a considerable amount in research and development each
year. The Company’s products are designed for golfers of
all skill levels, both amateur and professional.
1
The following table sets forth the contribution to net sales
attributable to the principal product groups for the periods
indicated:
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Year Ended December 31, | |
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2004 | |
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2002 | |
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(In millions) | |
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Drivers and fairway woods
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$ |
238.6 |
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25 |
% |
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$ |
252.4 |
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31 |
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$ |
310.0 |
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39 |
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Irons*
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259.1 |
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28 |
% |
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280.7 |
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34 |
% |
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252.2 |
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32 |
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Putters
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100.5 |
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11 |
% |
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142.8 |
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18 |
% |
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111.5 |
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14 |
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Golf balls
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231.3 |
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25 |
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78.4 |
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10 |
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66.0 |
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Accessories and other*
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105.1 |
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11 |
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59.7 |
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7 |
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53.5 |
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7 |
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Net sales
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$ |
934.6 |
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100 |
% |
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$ |
814.0 |
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$ |
793.2 |
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100 |
% |
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Beginning with the year ended December 31, 2004, the
Company includes wedge sales within the iron sales product
category. Previously, wedge sales were included as a component
of the accessories and other category. Prior periods have been
reclassified to conform with the current period presentation. |
For a discussion regarding the changes in net sales for each
product group from 2004 to 2003 and from 2003 to 2002, see
below, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Results of Operations” contained in Item 7.
The Company’s current principal products by product group
are described below:
Drivers and Fairway Woods. This product category includes
sales of the Company’s drivers and fairway woods, which are
sold under the Callaway Golf, Top-Flite and Ben Hogan brands.
The Company’s drivers and fairway woods are generally made
of metal (either titanium or steel) or a combination of metal
and a composite material. The Company’s products compete at
all price segments in the drivers and fairway woods category. In
general, composite/metal “Fusion” drivers and fairway
woods sell at higher price points than most titanium drivers and
fairway woods, and titanium products sell at higher price points
than steel products. The Company’s drivers and fairway
woods are available in a variety of lofts, shafts and other
specifications to accommodate the preferences and skill levels
of all golfers. All of the Company’s current drivers and
fairway woods conform to the current rules of the United States
Golf Association (the “USGA”) or the Royal and Ancient
Golf Club of St. Andrews (the “R&A”), as
applicable to the markets in which the products are intended to
be sold.
Irons. This product category includes sales of the
Company’s irons and wedges, which are sold under the
Callaway Golf, Ben Hogan and Top-Flite brands. The
Company’s irons are generally made of metal (either
titanium or steel) or a combination of metal and a composite
material. The Company’s products compete at all price
segments in the irons category. In general, the Company’s
composite/metal irons sell at higher price points than its
titanium irons, and the Company’s titanium irons sell at
higher price points than its steel irons. The Company’s
irons are available in a variety of lofts, shafts and other
specifications to accommodate the preferences and skill levels
of all golfers. All of the Company’s current iron products
conform to the current rules of the USGA and the R&A, as
applicable.
Putters. This product category includes sales of the
Company’s putters, which are sold under the Odyssey,
Callaway Golf, Ben Hogan and Top-Flite brands. The
Company’s products compete at all price segments in the
putters category. The Company’s putters are available in a
variety of styles, shafts and other specifications to
accommodate the preferences and skill levels of all golfers. All
of the Company’s current putter products conform to the
current rules of the USGA and the R&A, as applicable.
Golf Balls. This product category includes sales of the
Company’s golf balls, which are sold under the Callaway
Golf, Ben Hogan and Top-Flite brands. The Company’s golf
balls are generally either a 2-piece golf ball (consisting of a
core and cover) or a multi-layer golf ball (consisting of two or
more components in addition to the cover). The Company’s
golf ball products include covers that incorporate a traditional
dimple pattern as well as covers that incorporate the
Company’s unique HEX Aerodynamics (i.e., a series of
2
hexagons and pentagons separated by tubular ridges). The
Company’s products compete at all price segments in the
golf ball category. In general, the Company’s multi-layer
golf balls sell at higher price points than its 2-piece golf
balls. All of the Company’s current golf ball products
conform to the current rules of the USGA and the R&A, as
applicable.
Accessories and Other. This product category includes
sales of golf bags, golf gloves, golf headwear, travel covers
and bags, golf towels and golf umbrellas. This segment also
includes royalties from licensing of the Company’s
trademarks and service marks on products such as golf apparel,
golf shoes, watches, luggage and other golf related products
including headwear, travel bags, golf towels and golf umbrellas.
Product Design and Development
Product design at the Company is a result of the integrated
efforts of its product management, research and development,
manufacturing and sales departments, all of which work together
to generate new ideas for golf equipment. The Company has not
limited itself in its research efforts by trying to duplicate
designs that are traditional or conventional and believes it has
created an environment in which new ideas are valued and
explored. In 2004, 2003 and 2002, the Company invested
$30.6 million, $29.5 million and $32.2 million,
respectively, in research and development. The Company intends
to continue to invest substantial amounts in its research and
development activities in connection with its development of new
golf club and golf ball products.
The Company has the ability to create and modify golf club
designs by using computer aided design (“CAD”)
software, computer aided manufacturing (“CAM”)
software and computer numerical control milling equipment. CAD
software enables designers to develop computer models of new
clubhead and shaft designs. CAM software is then used by
engineers to translate the digital output from CAD computer
models so that physical prototypes can be produced. Through the
use of this technology, the Company has been able to accelerate
the design, development and testing of new golf clubs. In
addition, the Company’s sophisticated CAD/ CAM design,
tooling, ball prototyping and indoor testing equipment, together
with the Company’s predictive computer modeling capability,
allows it to develop and test prototype golf balls in a
relatively short cycle time. Further, the Company utilizes a
variety of testing equipment and computer software, including an
“Iron Byron” robot, launch monitors, a proprietary
virtual test center, a proprietary performance analysis system,
an indoor test range and other destructive and non-destructive
methods to develop and test its products.
For certain risks associated with product design and
development, see below, “Certain Factors Affecting Callaway
Golf Company — Market Acceptance of Products” and
“— New Product Introduction and Product
Cyclicality” contained in Item 7.
Manufacturing
The Company’s drivers, fairway woods, irons, putters and
wedges are assembled primarily at the Company’s facilities
in Carlsbad, California. A portion of these products are
assembled outside of the United States. The Company’s
products are assembled using components obtained from suppliers
both within the United States and internationally. The golf club
assembly process is very labor intensive.
Prior to the Top-Flite Acquisition, Callaway Golf manufactured
golf balls in its Carlsbad, California facility and Top-Flite
manufactured golf balls primarily in its Chicopee, Massachusetts
and Gloversville, New York facilities. Following the Top-Flite
Acquisition, the Company moved a majority of its Callaway Golf
ball manufacturing to the Chicopee and Gloversville facilities
and expects to move the remainder to these facilities in 2005.
The golf ball manufacturing process is much more automated than
the golf club assembly process, although a significant amount of
labor is still used in the golf ball manufacturing process.
For certain risks associated with manufacturing, see below,
“Certain Factors Affecting Callaway Golf
Company — Manufacturing Capacity” and
“— Dependence on Certain Suppliers and
Materials” contained in Item 7.
3
Sales and Marketing
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Sales in the United States |
Approximately 58%, 55% and 55% of the Company’s net sales
were derived from sales for distribution within the United
States in 2004, 2003 and 2002, respectively. The Company
primarily sells to both on- and off-course golf retailers and
sporting goods retailers who sell quality golf products and
provide a level of customer service appropriate for the sale of
such products. The Company also sells to mass merchants,
primarily with regard to its Top-Flite branded products. On a
consolidated basis, no one customer that distributes golf clubs
or balls in the United States accounted for more than 4% of the
Company’s revenues in 2004, 2003 or 2002. On a segment
basis, the golf ball customer base is much more concentrated
than the golf club customer base. In 2004, the top five golf
ball customers accounted for approximately 25% of the total golf
ball sales. A loss of one or more of these customers could have
a significant adverse effect upon the Company’s golf ball
sales.
Sales of the Callaway Golf and Odyssey branded golf clubs, golf
balls and accessories in the United States are made and
supported by full-time regional field representatives and
in-house sales and customer service representatives who are
employees of the Company. The Company maintains a separate sales
force for the sale of Top-Flite and Ben Hogan branded products.
Like Callaway Golf, the Top-Flite and Ben Hogan golf club, golf
ball and accessory sales in the United States are sold and
supported by full-time regional field representatives and
in-house sales and customer service representatives. However,
the regional field representatives that sell and support the
Top-Flite and Ben Hogan branded products are independent
contractors and are permitted to sell the golf products of other
companies, so long as such products do not compete with the
Top-Flite and Ben Hogan branded golf products.
Each geographic territory is covered by both a field
representative and a dedicated in-house sales representative who
work together to initiate and maintain relationships with
customers through frequent telephone calls and in-person visits.
The Company believes that this tandem approach of utilizing
field representatives and dedicated in-house sales
representatives provides the Company a competitive advantage. In
addition to these sales representatives, the Company also has
dedicated in-house customer service representatives.
In addition, other dedicated sales representatives service
corporate customers who want their corporate logo imprinted on
the Company’s golf balls, putters or golf bags. The Company
imprints the logos on its products, thereby retaining control
over the quality of the process and final product. The Company
also pays an agency fee to certain on- and off-course
professionals and retailers with whom it has a relationship for
corporate sales that originate through such professionals and
retailers.
The Company also has a separate team of manufacturing and
customer service representatives who focus on the Company’s
custom club sales. Custom club sales are generated primarily
from a club fitting experience designed by the Company for
golfers of all abilities. Club fittings are performed by golf
professionals who are specifically trained to utilize the
Company’s proprietary club fitting software. The Company
believes that offering golfers the opportunity to gain knowledge
of custom club specifications increases sales and promotes brand
loyalty.
The Company maintains various sales programs from time to time
including a Preferred Retailer Program. The Preferred Retailer
Program offers longer payment terms, as well as potential
rebates and discounts, for participating retailers in exchange
for providing certain benefits to the Company, including the
maintenance of agreed upon inventory levels, prime product
placement and retailer staff training.
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Sales Outside of the United States |
Approximately 42%, 45% and 45% of the Company’s net sales
were derived from sales for distribution outside of the United
States in 2004, 2003 and 2002, respectively. The Company does
business (either directly or through its subsidiaries and
distributors) in more than 100 countries around the world. The
Company’s management believes that controlling the
distribution of its products in certain major markets in the
world has been and will continue to be an important element in
the future growth and success of the Company.
4
The majority of the Company’s international sales are made
through its wholly-owned subsidiaries located in Europe, Japan,
Canada, Korea and Australia. In addition to sales through its
subsidiaries, the Company also sells through distributors in
over 65 foreign countries, including Singapore, Hong Kong,
Taiwan, China, the Philippines, India, South Africa and various
countries in South America. Prices of golf clubs and balls for
sales by distributors outside of the United States generally
reflect an export pricing discount to compensate international
distributors for selling and distribution costs. A change in the
Company’s relationship with significant distributors could
negatively impact the volume of the Company’s international
sales.
The Company’s sales programs in foreign countries are
specifically designed based upon local laws and competitive
conditions. Some of the sales programs utilized include the
custom club fitting experiences and the Preferred Retailer
Program or variations of those programs employed in the United
States as described above.
Conducting business outside of the United States subjects the
Company to increased risks inherent in international business.
See below, “Certain Factors Affecting Callaway Golf
Company — Foreign Currency Risk” and
“ — International Risks” contained in
Item 7.
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Sales of Pre-Owned Golf Clubs |
The Company sells certified, pre-owned Callaway Golf products
through its website, www.callawaygolfpreowned.com. The
Company generally acquires the pre-owned products through the
Company’s Trade In! Trade Up! program. The website for this
program is www.tradeintradeup.com. The Trade In! Trade
Up! program gives golfers the opportunity to trade in their used
Callaway Golf and select competitor golf clubs at authorized
Callaway Golf retailers or through the Callaway Golf Pre-Owned
website for credit toward the purchase of new or pre-owned
Callaway Golf equipment.
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Advertising and Promotion |
Within the United States, the Company has focused its
advertising efforts mainly on a combination of television
commercials, primarily during golf telecasts, and printed
advertisements in national magazines, such as Golf
Magazine, Golf World and Golfweek. Advertising
of the Company’s products outside of the United States is
generally handled by the Company’s subsidiaries in
coordination with U.S. direction.
In addition, the Company establishes relationships with
professional golfers and celebrities from other industries in
order to promote the Company’s products. The Company has
entered into endorsement arrangements with members of the
various professional golf tours to promote the Company’s
golf club and ball products. For certain risks associated with
such endorsements, see below, “Certain Factors Affecting
Callaway Golf Company — Golf Professional
Endorsements” contained in Item 7.
Competition
The golf club markets in which the Company competes are highly
competitive, and are served by a number of well-established and
well-financed companies with recognized brand names, as well as
new companies with popular products. With respect to metal woods
and irons, the Company’s major competitors are TaylorMade,
Titleist, Cobra, Cleveland, Ping and Mizuno. For putters, the
Company’s major competitors are Ping and Titleist. In
addition, the Company also competes with Dunlop, Bridgestone and
PRGR among others in Japan and throughout Asia. The Company
believes that it is the leader, or one of the leaders, in every
golf club market in which it competes.
The golf ball business is also highly competitive. There are a
number of well-established and well-financed competitors,
including Acushnet (Titleist and Pinnacle), Sumitomo Rubber
Industries (Srixon), Bridgestone (Precept), Nike, TaylorMade
(MaxFli) and others. These competitors have established market
share in the golf ball business, with Acushnet having a market
share of approximately 50% of the golf ball business in the
United States. The Company’s golf ball products have been
well received by both professional
5
and amateur golfers alike. The Company’s golf ball products
continue to receive a significant degree of usage on the major
professional golf tours and maintained the number two position
on tour in 2004. In addition, the Company’s golf ball
products achieved the number two retail market share in 2004.
For both golf clubs and golf balls, the Company generally
competes on the basis of technology, quality, performance,
customer service and price. For risks relating to competition,
see below, “Certain Factors Affecting Callaway Golf
Company — Competition” contained in Item 7.
Environmental Matters
The Company’s operations are subject to federal, state and
local environmental laws and regulations that impose limitations
on the discharge of pollutants into the environment and
establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of certain
materials, substances and wastes and the remediation of
environmental contaminants (“Environmental Laws”). In
the ordinary course of its manufacturing processes, the Company
uses paints, chemical solvents and other materials, and
generates waste by-products, that are subject to these
Environmental Laws. In addition, in connection with the
Top-Flite Acquisition, the Company assumed certain monitoring
and remediation obligations at the Top-Flite facilities.
The Company adheres to all applicable Environmental Laws and
takes action as necessary to comply with these laws. The Company
maintains an environmental and safety program and employs three
full-time environmental engineers to manage the program. The
environmental and safety program includes obtaining
environmental permits as required, capturing and appropriately
disposing of any waste by-products, tracking hazardous waste
generation and disposal, air emissions, safety situations,
material safety data sheet management and recycling, and
auditing and reporting on its compliance.
In addition, The Top-Flite Golf Company is a charter member in
the U.S. Environmental Protection Agency’s National
Performance Track program. This program recognizes facilities
that have demonstrated a commitment to superior environmental
performance and have a good record of compliance with
environmental regulations. The National Environmental
Performance Track was developed by the Environmental Protection
Agency to reward companies who do more than environmental
regulations require.
Historically, the costs of environmental compliance have not had
a material adverse effect upon the Company’s business.
Furthermore, the Company does not believe that the monitoring
and remedial obligations it assumed in connection with the
Top-Flite Acquisition will have a material adverse effect upon
the Company’s business. The Company believes that its
operations are in substantial compliance with all applicable
Environmental Laws.
Intellectual Property
The Company is the owner of over 3,000 U.S. and foreign
trademark registrations and over 1,500 U.S. and foreign patents
relating to the Company’s products, product designs,
manufacturing processes and research and development concepts.
Other patent and trademark applications are pending and await
registration. In addition, the Company owns various other
protectable rights under copyright, trade dress and other
statutory and common laws. The Company’s intellectual
property rights are very important to the Company and the
Company seeks to protect such rights through the registration of
trademarks and utility and design patents, the maintenance of
trade secrets and the creation of trade dress. When necessary
and appropriate, the Company enforces its rights through
litigation.
In the United States, the Company’s patents are generally
in effect for up to 20 years from the date of the filing of
the patent application. The Company’s trademarks are
generally valid as long as they are in use and their
registrations are properly maintained and have not been found to
become generic. See below, “Certain Factors Affecting
Callaway Golf Company — Intellectual Property and
Proprietary Rights” contained in Item 7.
6
Licensing
The Company from time to time licenses its trademarks and
service marks to third parties for use on products such as golf
apparel, golf shoes, watches, luggage and other golf related
products, such as headwear, travel bags, golf towels and golf
umbrellas. The Company has a current licensing arrangement with
Ashworth, Inc. for a complete line of Callaway Golf men’s
and women’s apparel for distribution in the United States,
Canada, Europe, Australia, New Zealand and South Africa. The
first full year in which the Company received royalty revenue
under this licensing arrangement was 2003. The Company also has
a current licensing arrangement with Sanei International Co.,
Ltd. (“Sanei”) for a complete line of Callaway Golf
men’s and women’s apparel for distribution in Asian
Pacific countries including Japan, Korea, Hong Kong, Taiwan,
Singapore, Indonesia, Malaysia, Thailand, Vietnam, the
Philippines, Brunei, Myanmar and China.
In addition to apparel, the Company has also entered into
licensing arrangements with (i) Tour Golf Group, Inc. for a
Callaway Golf footwear collection, (ii) Fossil, Inc. for a
line of Callaway Golf watches and clocks,
(iii) TRG Accessories, LLC for a collection consisting
of luggage, personal leather products and skin protection
products and (iv) Global Wireless Entertainment, Inc. for
the creation of golf-related software and applications for
wireless handheld devices and platforms. In 2003, as part of the
Top-Flite Acquisition, the Company assumed certain license
agreements Top-Flite had previously entered into with third
parties to license, among other things, the use of its Top-Flite
and Ben Hogan marks on apparel, souvenirs and gifts.
Employees
As of December 31, 2004, the Company and its subsidiaries
had approximately 3,000 full-time employees. In addition,
the Company employs temporary personnel to manage the seasonal
fluctuations of its business.
Historically, Callaway Golf employees have not been represented
by unions. The Top-Flite manufacturing employees in Chicopee,
Massachusetts, however, are unionized. Shortly after the
Top-Flite Acquisition was consummated the Company negotiated a
new collective bargaining agreement with the union in Chicopee
which is not scheduled to expire until September 30, 2008.
In addition, the Company’s production employees in Canada
and Australia are also unionized. The Company considers its
employee relations to be good.
Access to SEC Filings through Company Website
Interested readers can access the Company’s annual reports
on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (the “Exchange
Act”) through the Investor Relations section of the
Company’s website at www.callawaygolf.com. These
reports can be accessed free of charge from the Company’s
website as soon as reasonably practicable after the Company
electronically files such materials with, or furnishes them to,
the Securities and Exchange Commission. In addition, the
Company’s Corporate Governance Guidelines, Code of Conduct
and the written charters of the committees of the Board of
Directors are available in the Corporate Governance portion of
the Investor Relations section of the Company’s website and
are available in print to any shareholder who requests a copy.
The information contained on the Company’s website shall
not be deemed to be incorporated into this report.
Additional Factors Affecting the Company’s Business
The financial statements contained in this report and the
related discussion describe and analyze the Company’s
financial performance and condition for the periods indicated.
For the most part, this information is historical. The
Company’s prior results are not necessarily indicative of
the Company’s future performance or financial condition.
The Company therefore has included in this report at
Part II Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Certain Factors Affecting Callaway Golf
Company” a discussion of certain factors which could affect
the Company’s future performance or financial condition.
These factors could cause the Company’s future performance
or financial condition to differ materially from its prior
performance or financial condition or from management’s
expectations or estimates of the Company’s future
performance or financial condition. These factors, among
7
others, should be considered in assessing the Company’s
future prospects and prior to making an investment decision with
respect to the Company’s stock.
The Company and its subsidiaries conduct operations in both
owned and leased properties. The Company’s principal
executive offices and domestic operations are located in
Carlsbad, California. The eight buildings utilized in the
Company’s Carlsbad operations include corporate offices,
manufacturing, research and development, warehousing and
distribution facilities. These buildings comprise approximately
735,000 square feet. The Company owns seven of these
properties, representing approximately 585,000 square feet
of space. An additional property, representing approximately
150,000 square feet of space, is leased and the lease is
scheduled to expire in November 2007. As part of the Top-Flite
Acquisition, the Company acquired the Chicopee manufacturing
plant, warehouse and offices that encompass approximately
869,000 square feet and a manufacturing plant in
Gloversville, New York comprising approximately
70,000 square feet. In addition, the Company owns and
leases a number of other properties domestically and
internationally, including properties in Australia, Canada,
Japan, Korea and the United Kingdom. The Company’s
operations at each of these properties are used to some extent
for both the golf club and golf ball businesses. The Company
believes that its facilities currently are adequate to meet its
requirements.
|
|
| Item 3. |
Legal Proceedings |
In conjunction with the Company’s program of enforcing its
proprietary rights, the Company has initiated or may initiate
actions against alleged infringers under the intellectual
property laws of various countries, including, for example, the
U.S. Lanham Act, the U.S. Patent Act and other
pertinent laws. Defendants in these actions may, among other
things, contest the validity and/or the enforceability of some
of the Company’s patents and/or trademarks. Others may
assert counterclaims against the Company. Historically, these
matters individually and in the aggregate have not had a
material adverse effect upon the financial position or results
of operations of the Company. It is possible, however, that in
the future one or more defenses or claims asserted by defendants
in one or more of those actions may succeed, resulting in the
loss of all or part of the rights under one or more patents,
loss of a trademark, a monetary award against the Company or
some other material loss to the Company. One or more of these
results could adversely affect the Company’s overall
ability to protect its product designs and ultimately limit its
future success in the marketplace.
In addition, the Company from time to time receives information
claiming that products sold by the Company infringe or may
infringe patent or other intellectual property rights of third
parties. It is possible that one or more claims of potential
infringement could lead to litigation, the need to obtain
licenses, the need to alter a product to avoid infringement, a
settlement or judgment, or some other action or material loss by
the Company.
In the fall of 1999 the Company adopted a unilateral sales
policy called the “New Product Introduction Policy”
(“NPIP”). The NPIP sets forth the terms on which the
Company chooses to do business with its customers with respect
to the introduction of new products. The NPIP has been the
subject of several legal challenges. Currently pending cases,
described below, include Lundsford v. Callaway Golf, Case
No. 2001-24-IV, pending in Tennessee state court
(“Lundsford I”); Foulston v. Callaway Golf,
Case No. 02C3607, pending in Kansas state court;
Murray v. Callaway Golf Sales Company, Case
No. 3:04CV274-H, pending in the United States District
Court for the Western District of North Carolina; and
Lundsford v. Callaway Golf, Civil Action
No. 3:04-cv-442, pending in the United States District
Court for the Eastern District of Tennessee
(“Lundsford II”). An adverse resolution of the
NPIP cases could have a significant adverse effect upon the
Company’s results of operations, cash flows and financial
position.
Lundsford I was filed on April 6, 2001, and seeks to
assert a punitive class action by plaintiff on behalf of himself
and on behalf of consumers in Tennessee and Kansas who purchased
select Callaway Golf products covered by the NPIP on or after
March 30, 2000. Plaintiff asserts violations of Tennessee
and Kansas antitrust and consumer protection laws and is seeking
damages, restitution and punitive damages. The court has not
8
made any determination that the case may proceed in the form of
a class action. In light of the Lundsford II case
subsequently filed in the United States District Court,
described below, the parties have agreed to stay
Lundsford I, and to dismiss it without prejudice once the
federal court proceedings are underway.
In Foulston, filed on November 4, 2002, plaintiff seeks to
assert an alleged class action on behalf of Kansas consumers who
purchased Callaway Golf products covered by the NPIP and seeks
damages and restitution for the alleged class under Kansas law.
The trial court in Foulston stayed the case in light of
Lundsford I. The Foulston court has not made any
determination that the case may proceed in the form of a class
action.
The complaint in Murray was filed on May 14, 2004, alleging
that a retail golf business was damaged by the alleged refusal
of Callaway Golf Sales Company to sell certain products after
the store violated the NPIP, and by the failure to permit
plaintiff to sell Callaway Golf products on the internet. The
proprietor seeks compensatory and punitive damages associated
with the failure of his retail operation. Callaway Golf removed
the case to the United States District Court for the Western
District of North Carolina, and has answered the complaint
denying liability. The parties are currently engaged in
discovery, and a trial date in December 2005 has been set
by the court.
Lundsford II was filed on September 28, 2004 in the
United States District Court for the Eastern District of
Tennessee. The complaint in Lundsford II asserts that the
NPIP constitutes an unlawful resale price agreement and an
attempt to monopolize golf club sales prohibited by federal
antitrust law. The complaint also alleges a violation of the
state antitrust laws of Tennessee, Kansas, South Carolina and
Oklahoma. Lundsford II seeks to assert a nationwide class
action consisting of all persons who purchased Callaway Golf
clubs subject to the NPIP on or after March 30, 2000.
Plaintiff seeks treble damages under the federal antitrust laws,
compensatory damages under state law, and injunctive relief. The
Lundsford II court has not made a determination that the
case may proceed in the form of a class action. The parties are
engaged in discovery and motion practice.
On October 3, 2001, the Company filed suit in the United
States District Court for the District of Delaware, Civil Action
No. 01-669, against Dunlop Slazenger Group Americas, Inc.,
d/b/a Maxfli (“Maxfli”), for infringement of a
golf ball aerodynamics patent owned by the Company,
U.S. Patent No. 6,213,898 (the “Aerodynamics
Patent”). The Company later amended its complaint to add a
claim that Maxfli engaged in false advertising by claiming that
its A10 golf balls were the “longest ball on
tour.” Maxfli answered the complaint denying patent
infringement and false advertising, and also filed a
counterclaim asserting that former Maxfli employees hired by the
Company had disclosed confidential Maxfli trade secrets to the
Company, and that the Company had used that information to enter
the golf ball business. In the counterclaim, Maxfli sought
compensatory damages of $30.0 million; punitive damages
equal to two times the compensatory damages; prejudgment
interest; attorneys’ fees; a declaratory judgment; and
injunctive relief. On November 12, 2003, pursuant to an
agreement between the Company and Maxfli, the court dismissed
the Company’s claim for infringement of the Aerodynamics
Patent. On May 13, 2004, the Court granted the
Company’s motion for summary judgment, eliminating a
portion of Maxfli’s counterclaim and reducing Maxfli’s
compensatory damages claim from approximately $30.0 million
to $18.5 million. The case was tried to a jury beginning on
August 2, 2004. On August 12, 2004, the jury returned
a verdict of $2.2 million in favor of the Company based
upon its finding that Maxfli willfully engaged in false
advertising. The jury also rejected Maxfli’s counterclaim
that the Company used any Maxfli trade secrets. Maxfli filed
post-trial motions seeking to set aside the verdict and/or
obtain a new trial. In post-trial motions, Callaway Golf is
seeking attorneys’ fees and prejudgment interest on its
successful false advertising claim, while Maxfli is seeking
attorneys’ fees on the dismissal of the patent infringement
claims filed by Callaway Golf. It is expected that if Maxfli is
ultimately unsuccessful with its post-trial motions, it will
appeal the verdict. If Maxfli is successful with its post-trial
motions, or an appeal of the verdict, and Maxfli’s
counterclaims are ultimately resolved in Maxfli’s favor,
such matters could have a significant adverse effect upon the
Company’s results of operations, cash flows and financial
position.
On December 2, 2002, Callaway Golf Company was served with
a complaint filed in the Circuit Court of the 19th Judicial
District in and for Martin County, Florida, Case No. 935CA,
by the Perfect Putter Co. and
9
its principals. Plaintiffs sued Callaway Golf Company, Callaway
Golf Sales Company and a Callaway Golf Sales Company sales
representative. Plaintiffs alleged that the Company
misappropriated certain alleged trade secrets and proprietary
information of the Perfect Putter Co. and incorporated those
purported trade secrets in the Company’s Odyssey White
Hot 2-Ball Putter. Plaintiffs also alleged that the Company
made false statements and acted inappropriately during
discussions with plaintiffs. Plaintiffs sought compensatory
damages, exemplary damages, attorneys’ fees and costs, pre-
and post-judgment interest and injunctive relief. On
December 20, 2002, the Company removed the case to the
United States District Court for the Southern District of
Florida, Case No. 02-14342. On April 29, 2003, the
District Court denied plaintiffs’ motion to remand the case
to state court. The parties have resolved and dismissed this
litigation. As part of the resolution, Callaway Golf has
purchased certain putter patents from Perfect Putter. Other
terms of the resolution are confidential.
On December 14, 2004, Callaway Golf Sales Company was
served with a complaint captioned York v. Callaway Golf
Sales Company, filed in the Circuit Court for Dade County,
Florida, Case No. 04-25625 CA 11, asserting a
purported class action on behalf of all consumers who purchased
allegedly defective HX Red golf balls with cracked covers.
The complaint contains causes of action for strict liability,
breach of implied and express warranties, and violation of the
Magnuson-Moss Consumer Product Warranty Act. Plaintiff is
seeking compensatory damages, attorneys’ fees and
prejudgment interest according to the proof to be presented. On
January 12, 2005, Callaway Golf removed the case to the
United States District Court for the Southern District of
Florida.
The Company and its subsidiaries, incident to their business
activities, are parties to a number of legal proceedings,
lawsuits and other claims, including the matters specifically
noted above. Such matters are subject to many uncertainties and
outcomes are not predictable with assurance. Consequently,
management is unable to estimate the ultimate aggregate amount
of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these
matters. Except as discussed above with regard to the MaxFli
litigation and the NPIP cases, management believes at this time
that the final resolution of these matters, individually and in
the aggregate, will not have a material adverse effect upon the
Company’s consolidated annual results of operations, cash
flows or financial position.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Registrant
Biographical information concerning the Company’s executive
officers is set forth below.
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position(s) Held |
| |
|
| |
|
|
|
William C. Baker
|
|
|
71 |
|
|
Chairman and Chief Executive Officer |
|
Richard C. Helmstetter
|
|
|
63 |
|
|
Vice Chairman and Senior Executive Vice President, Strategic
Initiatives |
|
Steven C. McCracken
|
|
|
54 |
|
|
Senior Executive Vice President, Chief Legal Officer and
Secretary |
|
Bradley J. Holiday
|
|
|
51 |
|
|
Senior Executive Vice President and Chief Financial Officer |
|
Robert A. Penicka
|
|
|
42 |
|
|
Senior Executive Vice President and Chief Operating Officer,
Equipment |
|
John F. Melican
|
|
|
42 |
|
|
Senior Vice President and Global Marketing Officer |
William C. Baker is Chairman and Chief Executive Officer
of the Company and has served in such capacity since
August 2004. Mr. Baker has served as a Director of the
Company since January 1994. From August 1998 to
April 2000, Mr. Baker was the President of Meditrust
Operating Company. He was President and Chief Executive Officer
of the Los Angeles Turf Club, Inc., a subsidiary of Magna
International, Inc., from December 1998 to June 1999.
He was Chairman and Chief Executive Officer of The Santa Anita
Companies, Inc., a subsidiary of Meditrust Operating Company,
from November 1997 to December 1998.
10
Prior to that, he was Chairman of Santa Anita Realty
Enterprises, Inc. from April 1996 to November 1997 and
Chairman, President and Chief Executive Officer of Santa Anita
Operating Company from August 1996 to November 1997.
He was President and Chief Operating Officer of Red Robin
International, Inc. (a restaurant chain) from May 1993 to May
1995, and Chairman and Chief Executive Officer of Carolina
Restaurant Enterprises, Inc. from August 1992 to December 1995.
Mr. Baker was the principal shareholder and Chief Executive
Officer of Del Taco, Inc. from 1977 until 1988 when that
business was sold. He also serves as a Director of
La Quinta Corporation (f/k/a The Meditrust Companies),
Public Storage, Inc., California Pizza Kitchen, Inc., and Javo
Beverage Company. Mr. Baker received his law degree in 1957
from the University of Texas.
Richard C. Helmstetter is Vice Chairman and Senior
Executive Vice President, Strategic Initiatives of the Company
and has served in the capacity of Vice Chairman since November
2004 and in the capacity of Senior Vice President, Strategic
Initiatives since September 2003. He served as Senior Executive
Vice President, Chief of New Products from August 2000 to
September 2003 and as Senior Executive Vice President, Chief of
New Golf Club Products from January 1998 through August 2000.
Previously he served as Senior Executive Vice President, Chief
of New Products from April 1993 to January 1998.
Mr. Helmstetter served as President from 1990 to 1993 and
as Executive Vice President from 1986 to 1990. From 1967 to
1986, Mr. Helmstetter served as President of Adam Ltd., a
pool cue manufacturing and merchandising company which he
founded and operated in Japan. During 1982 and 1983,
Mr. Helmstetter also consulted extensively for several
Japanese, European and American companies, including Bridgestone
Corporation’s strategic planning group.
Mr. Helmstetter is a 1966 graduate of the University of
Wisconsin.
Steven C. McCracken is Senior Executive Vice President,
Chief Legal Officer and Secretary of the Company and has served
in such capacity since August 2000. He served as Executive Vice
President, Licensing and Chief Legal Officer from April 1997 to
August 2000. He has served as an Executive Vice President since
April 1996 and served as General Counsel from April 1994 to
April 1997. He served as Vice President from April 1994 to April
1996. He has served as Secretary since April 1994. Prior to
joining the Company, Mr. McCracken was a partner at Gibson,
Dunn & Crutcher LLP for 11 years, and had been in
the private practice of law for over 18 years. During part
of that period, he provided legal services to the Company.
Mr. McCracken received a B.A., magna cum laude, from the
University of California at Irvine in 1972 and a J.D. from the
University of Virginia in 1975.
Bradley J. Holiday is Senior Executive Vice President and
Chief Financial Officer of the Company and has served in such
capacity since September 2003. Mr. Holiday previously
served as Executive Vice President and Chief Financial Officer
since August 2000. Prior to joining the Company,
Mr. Holiday served as Vice President — Financial
Planning & Analysis for Gateway, Inc. Prior to Gateway,
Inc., Mr. Holiday was with Nike, Inc. in various capacities
beginning in April 1993, including Chief Financial
Officer — Golf Company, where he directed all global
financial initiatives and strategic planning for Nike,
Inc.’s golf business. Prior to Nike, Inc., Mr. Holiday
served in various financial positions with Pizza Hut, Inc. and
General Mills, Inc. Mr. Holiday has an M.B.A. in Finance
from the University of St. Thomas and a B.S. in Accounting from
Iowa State University.
Robert A. Penicka is Senior Executive Vice President, and
Chief Operating Officer, Equipment, of the Company and has
served in such capacity since January 2005. Mr. Penicka
also serves as the President of The Top-Flite Golf Company, a
wholly-owned subsidiary of the Company, and has served in such
capacity since September 2003. Previously, from June 2001 to
September 2003, he served as the Company’s Executive Vice
President of Manufacturing. Prior to becoming Executive Vice
President, Manufacturing, Mr. Penicka served as the
Company’s Senior Vice President of Golf Ball Manufacturing
from May 2000 until June 2001. He also previously held the
positions of Senior Vice President of Golf Club Manufacturing
and Vice President of Manufacturing Technology. Mr. Penicka
joined Callaway Golf in 1997 when the Company acquired Odyssey
Golf. At Odyssey Golf, Mr. Penicka served as Vice President
of Manufacturing, based in Chicago. Prior to entering the golf
business, he spent eight years with General Electric Company and
six years at Harman International Industries in Indianapolis as
Vice President of Manufacturing for its automotive OEM business.
Mr. Penicka graduated with a degree in Chemical Engineering
from The Ohio State University in 1984.
11
John F. Melican is Senior Vice President and Global
Marketing Officer of the Company and has served in such capacity
since February 2005. He served as Senior Vice President, Sales
and Marketing from October 2003 to February 2005.
Mr. Melican served as Vice President, Product Management
for the Company’s iron, wedge and putter business from
September 2001 to October 2003. Prior to joining the Company,
Mr. Melican was with Nike, Inc. in a variety of sales
management positions beginning in 1992, including Director of
Sales for Nike’s Team Sports business unit. Before joining
Nike, he worked in sales roles at The Warnaco Group with
well-known brands including the Chaps Ralph Lauren, Hathaway and
Jack Nicklaus Sportswear divisions. Mr. Melican received a
bachelor’s degree in business administration from the
University of San Diego.
Information with respect to the Company’s employment
agreements with its Chief Executive Officer and other four most
highly compensated executive officers, is contained in the
Company’s definitive Proxy Statement under the caption
“Compensation of Executive Officers — Employment
Agreements and Termination of Employment Arrangements,” to
be filed with the Commission within 120 days after the end
of fiscal year 2004 pursuant to Regulation 14A, which
information is incorporated herein by this reference. In
addition, the Company currently has employment agreements with
each of its executive officers which are included as exhibits to
this report.
12
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities |
The Company’s Common Stock is listed, and principally
traded, on the New York Stock Exchange (“NYSE”). The
Company’s symbol for its Common Stock is “ELY.”
As of February 28, 2005, the approximate number of holders
of record of the Company’s Common Stock was 9,000. The
following table sets forth the range of high and low per share
closing prices of the Company’s Common Stock and per share
dividends for the periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| Period: |
|
High | |
|
Low | |
|
Dividend | |
|
High | |
|
Low | |
|
Dividend | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
First Quarter
|
|
$ |
19.23 |
|
|
$ |
16.93 |
|
|
$ |
0.07 |
|
|
$ |
13.88 |
|
|
$ |
10.50 |
|
|
$ |
0.07 |
|
|
Second Quarter
|
|
$ |
19.95 |
|
|
$ |
11.09 |
|
|
$ |
0.07 |
|
|
$ |
14.66 |
|
|
$ |
11.83 |
|
|
$ |
0.07 |
|
|
Third Quarter
|
|
$ |
12.50 |
|
|
$ |
10.30 |
|
|
$ |
0.07 |
|
|
$ |
15.89 |
|
|
$ |
13.55 |
|
|
$ |
0.07 |
|
|
Fourth Quarter
|
|
$ |
13.50 |
|
|
$ |
9.28 |
|
|
$ |
0.07 |
|
|
$ |
17.07 |
|
|
$ |
14.85 |
|
|
$ |
0.07 |
|
|
|
|
Securities Authorized for Issuance Under Equity Compensation
Plans |
Information about the Company’s equity compensation plans
at December 31, 2004 is as follows:
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Shares | |
|
|
|
Number of Shares | |
| |
|
to be Issued Upon | |
|
Weighted Average | |
|
Remaining | |
| |
|
Exercise of | |
|
Exercise Price of | |
|
Available for | |
| Plan Category |
|
Outstanding Options | |
|
Outstanding Options | |
|
Future Issuance | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except dollar amounts) | |
|
Equity Compensation Plans Approved by
Shareholders(1)
|
|
|
5,721 |
|
|
$ |
18.02 |
|
|
|
9,084 |
(2) |
|
Equity Compensation Plans Not Approved by
Shareholders(3)
|
|
|
6,948 |
|
|
$ |
17.61 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,669 |
|
|
$ |
18.41 |
|
|
|
9,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Consists of the following plans: 1991 Stock Incentive Plan, 1996
Stock Option Plan, 1998 Stock Incentive Plan, Non-Employee
Directors Stock Option Plan, 2001 Non-Employee Directors Stock
Option Plan, 2004 Equity Incentive Plan and Employee Stock
Purchase Plan. No shares are available for grant under the 1991
Stock Incentive Plan, 1996 Stock Option Plan, 1998 Stock
Incentive Plan or Non-Employee Directors Stock Option Plan at
December 31, 2004. The 2001 Non-Employee Directors Stock
Option Plan provides for stock option awards only. The 2004
Equity Incentive Plan permits the award of stock options,
restricted stock and various other stock-based awards. |
| |
| (2) |
Includes 4,032,517 shares reserved for issuance under the
Employee Stock Purchase Plan. |
| |
| (3) |
Consists of the following plans: 1995 Employee Stock Incentive
Plan, Key Officer Plan and Promotion, Marketing and Endorsement
Stock Incentive Plan. No shares are available for grant under
these plans at December 31, 2004. |
Equity Compensation
Plans Not Approved By Shareholders
The Company has the following equity compensation plans which
were not approved by shareholders: the 1995 Employee Stock
Incentive Plan (the “1995 Plan”), the Promotion,
Marketing and Endorsement Stock Incentive Plan (the
“Promotion Plan”) and the Key Officer Plan. No shares
are available for grant under the 1995 Plan, the Promotion Plan
or the Key Officer Plan as of December 31, 2004. For
additional information, see “Notes to Consolidated
Financial Statements, Note 10 — Stock, Stock
Options and Rights.”
13
1995 Plan. Under the 1995 Plan, the Company granted stock
options to non-executive officer employees and consultants of
the Company. Although the 1995 Plan permitted stock option
grants to be made at less than the fair market value of the
Company’s Common Stock on the date of grant, the
Company’s practice was to generally grant stock options at
exercise prices equal to the fair market value of the
Company’s Common Stock on the date of grant.
Promotion Plan. Under the Promotion Plan, the Company
granted stock options to golf professionals and other endorsers
of the Company’s products. Such grants were generally made
at prices that were equal to the fair market value of the
Company’s Common Stock on the date of grant.
Key Officer Plan. At December 31, 2004, there
remained outstanding under this plan an option to purchase
100,000 shares of the Company’s common stock, which
previously had been issued to a former officer of the Company.
As of the date of this report, that option has expired and there
were no longer any options or awards outstanding under the key
officer plan.
|
|
|
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers |
In May 2002, the Company announced that its Board of Directors
authorized it to repurchase shares of its Common Stock in the
open market or in private transactions, subject to the
Company’s assessment of market conditions and buying
opportunities, up to a maximum cost to the Company of
$50.0 million. During 2004, the Company repurchased
353,000 shares of Common Stock at an average cost per share
of $17.84. There were no share repurchases during the fourth
quarter of 2004. As of December 31, 2004, the Company is
authorized to repurchase up to an additional $7.9 million
of its Common Stock under the repurchase program. The
Company’s repurchases of shares of Common Stock are
recorded at average cost in Common Stock held in treasury and
result in a reduction of shareholders’ equity. See below
“Share Repurchases” contained in Item 7.
|
|
| Item 6. |
Selected Financial Data |
The following statements of operations data and balance sheet
data for the five years ended December 31, 2004 were
derived from the Company’s audited consolidated financial
statements. Consolidated balance sheets at December 31,
2004 and 2003 and the related consolidated statements of
operations and statements of cash flows for each of the three
years in the period ended December 31, 2004 and notes
thereto appear elsewhere in this report. The data should be read
in conjunction with the annual consolidated financial
statements, related notes and other financial information
appearing elsewhere in this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004(2,3) | |
|
2003(4) | |
|
2002(5) | |
|
2001(6) | |
|
2000(7) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales(1)
|
|
$ |
934,564 |
|
|
$ |
814,032 |
|
|
$ |
793,219 |
|
|
$ |
818,072 |
|
|
$ |
840,612 |
|
|
Cost of sales
|
|
|
575,742 |
|
|
|
445,417 |
|
|
|
393,068 |
|
|
|
411,585 |
|
|
|
440,119 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross
profit(1)
|
|
|
358,822 |
|
|
|
368,615 |
|
|
|
400,151 |
|
|
|
406,487 |
|
|
|
400,493 |
|
|
Selling, general and administrative
expenses(1)
|
|
|
352,967 |
|
|
|
273,231 |
|
|
|
256,909 |
|
|
|
259,473 |
|
|
|
241,187 |
|
|
Research and development expenses
|
|
|
30,557 |
|
|
|
29,529 |
|
|
|
32,182 |
|
|
|
32,697 |
|
|
|
34,579 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from
operations(1)
|
|
|
(24,702 |
) |
|
|
65,855 |
|
|
|
111,060 |
|
|
|
114,317 |
|
|
|
124,727 |
|
|
Interest and other income,
net(1)
|
|
|
1,934 |
|
|
|
3,550 |
|
|
|
2,271 |
|
|
|
5,349 |
|
|
|
6,119 |
|
|
Interest expense
|
|
|
(945 |
) |
|
|
(1,522 |
) |
|
|
(1,660 |
) |
|
|
(1,552 |
) |
|
|
(1,524 |
) |
|
Unrealized energy derivative losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,922 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes and cumulative effect of
accounting change
|
|
|
(23,713 |
) |
|
|
67,883 |
|
|
|
111,671 |
|
|
|
98,192 |
|
|
|
129,322 |
|
|
Income tax provision (benefit)
|
|
|
(13,610 |
) |
|
|
22,360 |
|
|
|
42,225 |
|
|
|
39,817 |
|
|
|
47,366 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) before cumulative effect of accounting change
|
|
|
(10,103 |
) |
|
|
45,523 |
|
|
|
69,446 |
|
|
|
58,375 |
|
|
|
81,956 |
|
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(957 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(10,103 |
) |
|
$ |
45,523 |
|
|
$ |
69,446 |
|
|
$ |
58,375 |
|
|
$ |
80,999 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004(2,3) | |
|
2003(4) | |
|
2002(5) | |
|
2001(6) | |
|
2000(7) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) before cumulative effect of accounting change
|
|
$ |
(0.15 |
) |
|
$ |
0.69 |
|
|
$ |
1.04 |
|
|
$ |
0.84 |
|
|
$ |
1.17 |
|
| |
|
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
$ |
(0.15 |
) |
|
$ |
0.69 |
|
|
$ |
1.04 |
|
|
$ |
0.84 |
|
|
$ |
1.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) before cumulative effect of accounting change
|
|
$ |
(0.15 |
) |
|
$ |
0.68 |
|
|
$ |
1.03 |
|
|
$ |
0.82 |
|
|
$ |
1.14 |
|
| |
|
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
$ |
(0.15 |
) |
|
$ |
0.68 |
|
|
$ |
1.03 |
|
|
$ |
0.82 |
|
|
$ |
1.13 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
31,657 |
|
|
$ |
47,340 |
|
|
$ |
108,452 |
|
|
$ |
84,263 |
|
|
$ |
102,596 |
|
|
Marketable securities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,422 |
|
|
$ |
— |
|
|
Working capital
|
|
$ |
272,934 |
|
|
$ |
253,302 |
|
|
$ |
259,866 |
|
|
$ |
252,817 |
|
|
$ |
233,163 |
|
|
Total assets
|
|
$ |
735,737 |
|
|
$ |
748,566 |
|
|
$ |
679,845 |
|
|
$ |
647,602 |
|
|
$ |
630,934 |
|
|
Long-term liabilities
|
|
$ |
28,622 |
|
|
$ |
29,023 |
|
|
$ |
27,297 |
|
|
$ |
31,379 |
|
|
$ |
9,884 |
|
|
Total shareholders’ equity
|
|
$ |
586,317 |
|
|
$ |
589,383 |
|
|
$ |
543,387 |
|
|
$ |
514,349 |
|
|
$ |
511,744 |
|
|
|
| (1) |
Beginning with the first quarter of 2003, the Company records
royalty revenue in net sales and royalty related expenses as
selling expenses. Previously, royalty revenue and the related
expenses were recorded as components of other income. Prior
periods have been reclassified to conform with the current
period presentation. |
| |
| (2) |
On May 28, 2004, the Company acquired all of the issued and
outstanding shares of stock of FrogTrader, Inc. Thus, the
Company’s financial data includes the FrogTrader, Inc.
results of operation from May 28, 2004 forward. |
| |
| (3) |
During 2004, the Company’s gross profit, net income and
earnings per common share include the recognition of certain
integration charges related to the consolidation of its Callaway
Golf and Top-Flite golf ball and golf club manufacturing and
research and development operations. These charges reduced the
Company’s gross profit, net income and earnings per common
share by approximately $15.7 million, $17.5 million
and $0.26, respectively. (see Note 3). |
| |
| (4) |
On September 15, 2003 the Company completed the domestic
portion of the Top-Flite Acquisition. The settlement of the
international assets was effective October 1, 2003. Thus,
the Company’s financial data includes The Top-Flite Golf
Company results of operations in the United States from
September 15, 2003, and the international operations from
October 1, 2003 forward. Additionally, the Company’s
2003 gross profit, net income and earnings per common share
include the recognition of certain integration charges related
to the consolidation of its Callaway Golf and Top-Flite golf
ball and golf club manufacturing and research and development
operations. These charges reduced the Company’s gross
profit, net income and earnings per common share by
approximately $24.1 million, $16.1 million and $0.24,
respectively (see Note 3 to the Consolidated Financial
Statements). |
| |
| (5) |
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 reserve.
During the third quarter of 2002, the Company reduced its
warranty reserve by approximately $17.0 million, pre-tax
(see Note 4 to the Consolidated Financial Statements). |
15
|
|
| (6) |
For 2001, 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 rates. During the second and third
quarters of 2001, the Company recorded $6.4 million and
$7.8 million, respectively, of after-tax unrealized losses.
During the fourth quarter of 2001, the Company terminated the
energy contract. As a result, the Company will continue to
reflect the derivative valuation account on its balance sheet
with no future valuation adjustments for changes in market
rates, subject to periodic review (see Note 13 to the
Consolidated Financial Statements). |
| |
| (7) |
The Company adopted Staff Accounting Bulletin No. 101,
“Revenue Recognition in Financial Statements”
(“SAB No. 101”) in the fourth quarter of
2000 with an effective date of January 1, 2000. As a result
of the adoption of SAB No. 101, the Company recognized
a cumulative effect adjustment of $1.0 million in the
Consolidated Statement of Operations for the year ended
December 31, 2000 to reflect the change in the
Company’s revenue recognition policy to recognize revenue
at the time both legal and practical risk of loss transfers to
the customer (see Note 2 to the Consolidated Financial
Statements). |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion should be read in conjunction with
the Consolidated Financial Statements, the related notes and the
“Important Notice to Investors” that appear elsewhere
in this report.
Regulation G Disclosure
The Company’s discussion and analysis of its results of
operations, financial condition and liquidity set forth in this
Item 7 have been derived from financial statements prepared
in accordance with accounting principles generally accepted in
the United States (“GAAP”). In addition to the GAAP
results of operations, the Company has also provided additional
information concerning the Company’s results that includes
certain financial measures not prepared in accordance with GAAP.
The non-GAAP financial measures included in this discussion are
pro forma gross profit, net income and earnings per share
amounts that exclude from 2003 charges associated with the
integration of the Top-Flite business and from 2002 the
adjustment to the Company’s warranty reserve. These
non-GAAP financial measures should not be considered a
substitute for any measure derived in accordance with GAAP.
These non-GAAP financial measures may also be inconsistent with
the manner in which similar measures are derived or used by
other companies. Management believes that the presentation of
such non-GAAP financial measures, when considered in conjunction
with the most directly comparable GAAP financial measures,
provides useful information to investors by permitting
additional relevant period-over-period comparisons of the
historical operations of the Callaway Golf business. The Company
has included in this discussion supplemental information which
reconciles those non-GAAP financial measures to the most
directly comparable financial measures prepared in accordance
with GAAP.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its results of
operations, financial condition and liquidity are based upon the
Company’s consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and
judgments 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. The
Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances. Actual results may materially differ
from these estimates under different assumptions or conditions.
On an on-going basis, the Company reviews its estimates to
ensure that the estimates appropriately reflect changes in its
business or as new information becomes available.
16
Management believes the following critical accounting policies
affect its more significant estimates and assumptions used in
the preparation of its consolidated financial statements:
Sales are recognized when both title and risk of loss transfer
to the customer. Sales are recorded net of an allowance for
sales returns and sales programs. Sales returns are estimated
based upon historical returns, current economic trends, changes
in customer demands and sell-through of products. The Company
also records estimated reductions to revenue for sales programs
such as incentive offerings. Sales program accruals are
estimated based upon the attributes of the sales program,
management’s forecast of future product demand, and
historical customer participation in similar programs. If the
actual costs of sales returns and sales programs significantly
exceed the recorded estimated allowance, the Company’s
sales would be significantly adversely affected.
|
|
|
Allowance for Doubtful Accounts |
The Company maintains an allowance for estimated losses
resulting from the failure of its customers to make required
payments. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. If the actual uncollected
amounts significantly exceed the estimated allowance, the
Company’s operating results would be significantly
adversely affected.
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. The
inventory balance, which includes material, labor and
manufacturing overhead costs, is recorded net of an estimated
allowance for obsolete or unmarketable inventory. The estimated
allowance for obsolete or unmarketable inventory is based upon
management’s understanding of market conditions and
forecasts of future product demand, all of which are subject to
change. If the actual amount of obsolete or unmarketable
inventory significantly exceeds the estimated allowance, the
Company’s cost of sales, gross profit and net income would
be significantly adversely affected.
In the normal course of business, the Company acquires tangible
and intangible assets. The Company periodically evaluates the
recoverability of the carrying amount of its long-lived assets
(including property, plant and equipment, goodwill and other
intangible assets) whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully
recoverable. An impairment is assessed when the undiscounted
future cash flows estimated to be derived from an asset are less
than its carrying amount. Impairments are recognized in
operating earnings. The Company uses its best judgment based on
the most current facts and circumstances surrounding its
business when applying these impairment rules to determine the
timing of the impairment test, the undiscounted cash flows used
to assess impairments, and the fair value of a potentially
impaired asset. Changes in assumptions used could have a
significant impact on the Company’s assessment of
recoverability.
The Company has a stated two-year warranty policy for its golf
clubs, although the Company’s historical practice has been
to honor warranty claims well after the two-year stated warranty
period. The Company’s policy is to accrue the estimated
cost of satisfying future warranty claims at the time the sale
is recorded. In estimating its future warranty obligations, the
Company considers various relevant factors, including the
Company’s stated warranty policies and practices, the
historical frequency of claims, and the cost to replace or
repair its products under warranty. If the number of actual
warranty claims or the cost of satisfying warranty
17
claims significantly exceeds the estimated warranty reserve, the
Company’s cost of sales, gross profit and net income would
be significantly adversely affected.
Current income tax expense (benefit) is the amount of income
taxes expected to be payable or receivable for the current year.
A deferred income tax asset or liability is established for the
expected future consequences resulting from temporary
differences in the financial reporting and tax bases of assets
and liabilities. The Company provides a valuation allowance for
its deferred tax assets when, in the opinion of management, it
is more likely than not that such assets will not be realized.
While the Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise,
should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future,
an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
The Company is required to file federal and state tax returns in
the United States and various other tax returns in foreign
jurisdictions. The preparation of these tax returns requires the
Company to interpret the applicable tax laws and regulations in
effect in such jurisdictions, which could affect the amount of
tax paid by the Company. The Company, in consultation with its
tax advisors, bases its tax returns on interpretations that are
believed to be reasonable under the circumstances. The tax
returns, however, are subject to routine reviews by the various
taxing authorities in the jurisdictions in which the Company
files its returns. As part of these reviews, a taxing authority
may disagree with respect to the interpretations the Company
used to calculate its tax liability and therefore require the
Company to pay additional taxes. As required under applicable
accounting rules, the Company therefore accrues an amount for
its estimate of additional tax liability the Company could incur
as a result of the ultimate resolution of disagreements with the
various taxing authorities. The tax contingency accrual is
recorded as a component of the Company’s net income taxes
payable/receivable balance, which the Company reviews and
updates over time as more definitive information becomes
available from taxing authorities, completion of tax audits or
upon occurrence of other events.
|
|
|
Change in Accounting Estimate |
As discussed above, the Company has a stated two-year warranty
policy for its golf clubs, although the Company’s
historical practice has been to honor warranty claims well after
the two-year stated warranty period. Prior to the third quarter
of 2002, the Company’s method of estimating both its
implicit 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, such as the introduction of products with new technology
or materials that would be more susceptible to failure or
breakage, and other business risks, such as increased warranty
liability as a result of acquisitions. In many cases, additions
to the warranty reserve for new product introductions have been
based on management’s judgment of possible future claims
derived from the limited product failure data that was available
at the time.
Beginning in the second quarter of 2001, the Company began to
compile data that illustrated the timing of warranty claims in
relation to product life cycles. In the third quarter of 2002,
the Company determined it had gathered sufficient data and
concluded it should enhance its warranty accrual estimation
methodology to utilize the additional data. The analysis of the
data, in management’s judgment, provided management with
more insight into timing of claims and demonstrated that some
product failures are more likely to occur early in a
product’s life cycle while other product failures occur in
a more linear fashion over the product’s life cycle. As a
result of its analysis of the additional information, the
Company believes it has gained better insight and improved
judgment to more accurately project the ultimate failure rates
of its products. As a result of this refinement in its
methodology, the Company concluded that it should change its
methodology of estimating warranty accruals and reduce its
warranty reserve by approximately $17.0 million. The
$17.0 million reduction is recorded in cost of sales and
favorably impacted gross profit as a percentage of net sales by
two percentage
18
points for the year ended December 31, 2002. The change in
methodology has been accounted for as a change in accounting
principle inseparable from a change in estimate.
In connection with Regulation G, the Company provides the
following table which summarizes what net income and earnings
per share would have been had the warranty reserve adjustment,
adjusted for taxes, been excluded from reported results and
reconciles such non-GAAP financial measures to the most directly
comparable GAAP financial measures (in millions, except per
share data):
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2002 | |
| |
|
| |
|
Reported net income
|
|
$ |
69.4 |
|
| |
Non-cash warranty reserve adjustment, net of tax
|
|
|
(10.5 |
) |
| |
|
|
|
|
Pro forma net income
|
|
$ |
58.9 |
|
| |
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
Reported net income
|
|
$ |
1.04 |
|
| |
Non-cash warranty reserve adjustment, net of tax
|
|
|
(0.16 |
) |
| |
|
|
|
|
Pro forma basic earnings per share
|
|
$ |
0.88 |
|
| |
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
Reported net income
|
|
$ |
1.03 |
|
| |
Non-cash warranty reserve adjustment, net of tax
|
|
|
(0.16 |
) |
| |
|
|
|
|
Pro forma diluted earnings per share
|
|
$ |
0.87 |
|
| |
|
|
|
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is
contained in Note 2 to the Consolidated Financial
Statements, which is incorporated herein by this reference.
FrogTrader Acquisition
On May 28, 2004, the Company acquired all of the issued and
outstanding shares of stock of FrogTrader, Inc
(“FrogTrader”), an e-commerce company which
subsequently changed its name to Callaway Golf Interactive, Inc.
The Company’s consolidated statements of operations include
the financial results of FrogTrader for the period from the
acquisition date of May 28, 2004. The Company acquired
FrogTrader to stimulate purchases of new clubs by growing the
Trade In! Trade Up! program and to enable the Company to better
manage the distribution of pre-owned golf clubs and the Callaway
Golf brand.
The FrogTrader acquisition was accounted for as a purchase in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 141, “Business
Combinations.” Under SFAS No. 141, the aggregate
cost of the acquired stock was $15.2 million, which
included transaction costs of approximately $0.2 million,
and was paid entirely in cash. The aggregate acquisition costs
exceeded the estimated fair value of the net assets acquired. As
a result, the Company has recorded goodwill of
$9.1 million, none of which is deductible for tax purposes.
The Company has recorded the fair values of FrogTrader’s
internally developed software and
19
certain customer information based on an assessment from an
outside valuation company received during 2004. The allocation
of the aggregate acquisition costs is as follows (in millions):
| |
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
| |
Cash
|
|
$ |
6.0 |
|
| |
Accounts receivable
|
|
|
0.1 |
|
| |
Inventory
|
|
|
2.0 |
|
| |
Other current assets
|
|
|
1.5 |
|
| |
Property, plant and equipment
|
|
|
0.3 |
|
| |
Internally developed software
|
|
|
1.2 |
|
| |
Customer lists
|
|
|
0.7 |
|
| |
Goodwill
|
|
|
9.1 |
|
|
Liabilities:
|
|
|
|
|
| |
Current liabilities
|
|
|
(5.6 |
) |
| |
Long-term liabilities
|
|
|
(0.1 |
) |
| |
|
|
|
| |
|
Total net assets acquired
|
|
$ |
15.2 |
|
| |
|
|
|
Top-Flite Acquisition
On September 15, 2003, the Company acquired through a
court-approved sale substantially all of the golf-related assets
of TFGC Estate Inc. (f/k/a The Top-Flite Golf Company, f/k/a
Spalding Sports Worldwide, Inc.) and thereafter completed the
valuation and settlement of certain additional assets related to
the international operations of TFGC Estate Inc. (the
“Top-Flite Acquisition”). The settlement of the
international assets was effective October 1, 2003. Assets
located in the United States were acquired by the Company’s
newly-formed, wholly-owned subsidiary, The Top-Flite Golf
Company. Foreign assets were acquired by the Company’s
wholly-owned subsidiaries in the relevant countries.
The acquisition of the Top-Flite assets provided a unique
opportunity to significantly increase the size and profitability
of the Company’s golf ball business and the Company was
able to purchase the acquired assets at less than their
estimated fair value. The Company paid the cash purchase price
for the Top-Flite Acquisition from cash on hand. The Company
intends to continue the U.S. and foreign operations of the
acquired golf assets, including the use of the acquired assets
in the manufacturing of golf balls and golf clubs and the
commercialization of the Top-Flite and Ben Hogan brands, patents
and trademarks.
The Top-Flite Acquisition was accounted for as a purchase in
accordance with SFAS No. 141. Under
SFAS No. 141, the aggregate cost of the acquired
assets was $183.0 million, which includes cash paid of
$154.1 million, transaction costs of approximately
$6.3 million, and assumed liabilities of approximately
$22.5 million. The estimated fair value of the assets
exceeded the estimated aggregate acquisition costs. As a
20
result, the Company was required to reduce the carrying value of
the acquired long-term assets on a pro rata basis. The
allocation of the aggregate acquisition costs is as follows (in
millions):
| |
|
|
|
|
|
|
|
Assets Acquired:
|
|
|
|
|
| |
Accounts receivable
|
|
$ |
45.3 |
|
| |
Inventory
|
|
|
32.8 |
|
| |
Other assets
|
|
|
1.1 |
|
| |
Property and equipment
|
|
|
55.8 |
|
| |
Intangible assets
|
|
|
48.0 |
|
|
Liabilities Assumed:
|
|
|
|
|
| |
Current liabilities
|
|
|
(17.4 |
) |
| |
Long-term liabilities
|
|
|
(5.1 |
) |
| |
|
|
|
| |
|
Total net assets acquired
|
|
$ |
160.5 |
|
| |
|
|
|
During the fourth quarter of 2003, the Company began
consolidating the Callaway Golf and Top-Flite golf ball and golf
club manufacturing and research and development operations. In
connection with the consolidation, the Company incurred charges
to pre-tax earnings in the amounts of $28.5 million and
$24.1 million in 2004 and 2003, respectively. During 2004
these charges included severance, the disposition of certain
long-lived assets and other costs associated with the
consolidation of certain facilities. The charges incurred during
2003 related to a decrease in the carrying value of the
Company’s golf ball assets in connection with the
disposition of certain golf ball manufacturing equipment. On
January 20, 2005, the Company announced that in 2005 it
expects to incur additional pre-tax charges of approximately
$7.0 to $12.0 million as it continues to consolidate its
Callaway Golf and Top-Flite operations. These additional charges
are expected to include non-cash charges for acceleration of
depreciation on certain golf ball manufacturing equipment and
cash charges related to severance and facility consolidations.
The Company’s results of operations include The Top-Flite
Golf Company’s results in the United States beginning
September 15, 2003 and the results of the international
operations beginning October 1, 2003.
Results of Operations
|
|
|
Years Ended December 31, 2004 and 2003 |
Net sales increased 15% to $934.6 million for the year
ended December 31, 2004 as compared to $814.0 million
for the year ended December 31, 2003. The overall increase
in net sales is primarily due to a $153.0 million (195%)
increase in the sales of golf balls and a $45.5 million
(76%) increase in the sales of accessories and other products as
compared to 2003. The increase in golf ball sales resulted from
the inclusion of Top-Flite ball sales for a full year in 2004
compared to fifteen weeks in 2003 as well as a
$42.1 million increase in Callaway Golf brand golf ball
sales. The increase in accessories and other products sales is
primarily due to the inclusion of Top-Flite accessories and
other product sales for a full year in 2004 compared to fifteen
weeks in 2003. These increases were partially offset by a
$42.3 million (30%) decrease in sales of putters, a
$21.6 million (8%) decrease in sales of irons and a
$13.9 million (5%) decrease in sales of woods in 2004 as
compared to 2003.
The Company’s net sales were significantly affected by the
$171.3 million increase in sales of Top-Flite and Ben Hogan
branded products due to the inclusion of these sales for a full
year in 2004 compared to fifteen weeks in 2003. Excluding sales
of Top-Flite and Ben Hogan branded products, sales of Callaway
Golf and Odyssey branded products were $722.8 million in
2004, a $50.8 million (7%) decrease as compared to 2003.
This decrease is primarily due to a decline in sales of products
that were in their second and third year of their product life
cycles as well as a decline in average selling prices.
The Company believes that its overall net sales in 2004 were
adversely affected by continued competitive pressures (which had
a negative impact upon average selling prices), limited market
acceptance of certain of the Company’s 2004 products,
continued economic uncertainty in many of the Company’s key
markets, as
21
well as the military actions in the Middle East. The
Company’s net sales are also affected by changes in foreign
currency rates. See below, “Certain Factors Affecting
Callaway Golf Company — Foreign Currency Risk.”
Net sales information by product category is summarized as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Driver and fairway woods
|
|
$ |
238.6 |
|
|
$ |
252.4 |
|
|
$ |
(13.8 |
) |
|
|
(5 |
)% |
| |
Irons*
|
|
|
259.1 |
|
|
|
280.7 |
|
|
|
(21.6 |
) |
|
|
(8 |
)% |
| |
Putters
|
|
|
100.5 |
|
|
|
142.8 |
|
|
|
(42.3 |
) |
|
|
(30 |
)% |
| |
Golf balls
|
|
|
231.3 |
|
|
|
78.4 |
|
|
|
152.9 |
|
|
|
195 |
% |
| |
Accessories and other*
|
|
|
105.1 |
|
|
|
59.7 |
|
|
|
45.4 |
|
|
|
76 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
934.6 |
|
|
$ |
814.0 |
|
|
$ |
120.6 |
|
|
|
15 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Beginning with the year ended December 31, 2004, the
Company includes wedge sales within the iron sales product
category. Previously, wedge sales were included as a component
of the accessories and other category. Prior periods have been
reclassified to conform with the current period presentation. |
The $13.8 million (5%) decrease in net sales of drivers and
fairway woods to $238.6 million for the year ended
December 31, 2004 resulted from lower average selling
prices, partially offset by higher sales volumes in 2004
compared to the prior year. The majority of this decrease in
sales related to a decline in sales of titanium fairway woods
products. This decline in fairway woods sales was expected as
the titanium fairway woods products were introduced in 2003 and
2002 and were considered closeout products in 2004. Also
contributing to the decline in woods sales were the credits
given to retailers in connection with sales programs to reduce
inventory levels at retail. These declines were partially offset
by an increase in sales of the Company’s steel fairway
woods products and sales of the Company’s new hybrid woods
products and new fusion fairway woods products which were
introduced during 2004.
The $21.6 million (8%) decrease in net sales of irons to
$259.1 million for the year ended December 31, 2004
was due to a combination of lower sales volumes and lower
average selling prices in 2004 compared to 2003. This decline
was expected as the Company’s steel and titanium iron
products were in the second year of their product life cycle and
such products generally sell better in the first year after
introduction. These decreases were partially offset by the
introduction of the Company’s fusion irons in 2004 as well
as an increase in Top-Flite irons sales, resulting from the
inclusion of Top-Flite sales for a full twelve months in 2004 as
compared to fifteen weeks in 2003.
The $42.3 million (30%) decrease in net sales of putters to
$100.5 million for the year ended December 31, 2004
was due to a combination of lower sales volumes and lower
average selling prices in 2004 compared to 2003. The majority of
this decrease was attributable to decreased sales of White Hot
putters which were introduced in 2002, partially offset by the
introduction of the new White Steel line of putters in 2004 and
the inclusion of Top-Flite sales for a full twelve months in
2004 as compared to fifteen weeks in 2003.
The $153.0 million (195%) increase in net sales of golf
balls to $231.3 million for the year ended
December 31, 2004 was primarily attributable to higher
sales volumes resulting from the inclusion of Top-Flite and Ben
Hogan golf ball sales for a full twelve months in 2004 as
compared to fifteen weeks in 2003. Sales of the Top-Flite and
Ben Hogan brand golf balls were $144.9 million. Callaway
Golf ball sales during 2004 were $86.4 million, an increase
of $42.1 million (95%) from the year ended 2003. The
increase in sales of Callaway Golf brand golf balls was driven
by the success of the HX Tour golf ball products, as well
as increased sales across the entire line of Callaway Golf ball
products.
22
The $45.4 million (76%) increase in net sales of
accessories and other products is primarily attributable to
sales of Top-Flite and Ben Hogan bags, gloves and other
accessories, sales of pre-owned products through the FrogTrader
business acquired in May of 2004, combined with an increase in
sales of Callaway Golf shoes, travel bags and other accessories.
Net sales information by region is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In millions) | |
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
546.2 |
|
|
$ |
449.4 |
|
|
$ |
96.8 |
|
|
|
22 |
% |
| |
Europe
|
|
|
169.5 |
|
|
|
145.1 |
|
|
|
24.4 |
|
|
|
17 |
% |
| |
Japan
|
|
|
70.5 |
|
|
|
101.3 |
|
|
|
(30.8 |
) |
|
|
(30 |
)% |
| |
Rest of Asia
|
|
|
51.7 |
|
|
|
58.3 |
|
|
|
(6.6 |
) |
|
|
(11 |
)% |
| |
Other foreign countries
|
|
|
96.7 |
|
|
|
59.9 |
|
|
|
36.8 |
|
|
|
61 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
934.6 |
|
|
$ |
814.0 |
|
|
$ |
120.6 |
|
|
|
15 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the United States increased $96.8 million
(22%) to $546.2 million during 2004 versus 2003. Overall,
the Company’s sales in regions outside of the United States
increased $23.8 million (7%) to $388.4 million during
2004 versus 2003. This increase in international sales is
primarily attributable to a $24.4 million (17%) increase in
sales in Europe and a $36.8 million (61%) increase in sales
in other foreign countries. The increase in the United States,
Europe and other foreign countries, was primarily attributable
to the inclusion of Top-Flite for a full twelve months in 2004
versus fifteen weeks in 2003. These increases were partially
offset by a $30.8 million (30%) decrease in sales in Japan
and a $6.6 million (11%) decrease in sales in other areas
of Asia.
For the year ended December 31, 2004, gross profit
decreased $9.8 million (3%) to $358.8 million from
$368.6 million in the comparable period of 2003. Gross
profit as a percentage of net sales decreased 7 percentage
points to 38% in 2004 as compared to 45% in 2003. The
Company’s gross profit in 2004 and 2003 was unfavorably
impacted by $15.7 million and $24.1 million,
respectively, as a result of charges associated with the
integration of the Top-Flite operations. The Company’s
overall gross profit was also negatively impacted by lower
average selling prices of golf club and ball products, resulting
from increased competitive pressure in the marketplace during
2004, as well as lower Top-Flite margins.
Selling expenses increased $55.3 million (27%) in 2004 to
$263.1 million from $207.8 million in 2003, and were
28% and 26% of net sales, respectively. This increase was
primarily due to the $44.2 million increase in Top-Flite
selling expenses resulting from the inclusion of a full year of
Top-Flite selling expenses in 2004 as compared to fifteen weeks
in 2003. The increase was also due to a $17.2 million
increase in tour and promotional expenses incurred primarily
during the first half of the year, as a result of the
Company’s strategy to increase its presence on golf’s
major professional tours. Additionally, the Company incurred
$4.4 million of selling integration costs in connection
with the integration of the Top-Flite operations with the
Callaway Golf operations. These increases were partially offset
by decreases in other selling and tour expense of
$7.3 million and other promotional golf club expense of
$3.2 million.
General and administrative expenses increased $24.5 million
(37%) in 2004 to $89.9 million from $65.4 million in
2003, and were 10% and 8% of net sales, respectively. This
increase was primarily due to the $12.9 million increase in
Top-Flite general and administrative expenses resulting from the
inclusion of a full year of Top-Flite expenses in 2004 as
compared to fifteen weeks of Top-Flite expenses in 2003, as well
as $7.6 million of general and administrative expenses
incurred in connection with the integration of the Top-Flite
operations with the Callaway Golf operations. This increase was
also due to an increase in legal fees of $5.4 million
primarily related to the Dunlop/ Maxfli litigation and a
$2.0 million increase resulting from the inclusion of seven
months of FrogTrader general and administrative expenses during
the year ended December 31, 2004.
23
Research and development expenses increased $1.1 million
(4%) in 2004 to $30.6 million from $29.5 million in
2003, and were 3% and 4% of net sales in 2004 and 2003,
respectively. The dollar increase was primarily due to the
$3.8 million increase in Top-Flite expenses resulting from
the inclusion of a full year of Top-Flite expenses in 2004 as
compared to fifteen weeks of Top-Flite expenses in 2003, as well
as $0.9 million of research and development expenses
incurred in connection with the integration of the Top-Flite
operations with the Callaway Golf operations. This increase was
partially offset by a $2.0 million decrease in employee
costs during 2004 due to a decrease in personnel in 2004
compared to 2003.
Interest and other income decreased $1.6 million (46%) in
2004 to $1.9 million from $3.6 million in 2003. This
decrease is primarily attributable to a $3.3 million
decrease in foreign currency transactional gains partially
offset by a $2.1 million decrease in foreign currency
contract losses as well as a decrease in interest income of
approximately $0.6 million as a result of a decrease in
cash invested during 2004 compared to 2003.
Interest expense decreased $0.6 million (38%) in 2004 to
$0.9 million compared to $1.5 million in 2003. This
decrease is due to a decrease in the average amount borrowed
under the Company’s line of credit during 2004.
During 2004, the Company recorded an income tax benefit of
$13.6 million. The income tax benefit as a percentage of
loss before taxes was 57% in 2004 as compared to a provision of
33% in 2003. The 2004 effective tax rate was positively impacted
by the reversal of previously accrued taxes primarily as a
result of the resolution of certain tax audits. The 2003 tax
rate was positively impacted by an atypical benefit related to
the statutory U.S. export sales incentive.
Net income for the year ended December 31, 2004 decreased
122% to a loss of $10.1 million from income of
$45.5 million in 2003. Earnings per diluted share decreased
to a loss of $0.15 per share in 2004 as compared to earnings of
$0.68 per share in 2003. Net income was negatively impacted
by after-tax charges related to the integration of the Callaway
Golf and Top-Flite operations in the amounts of
$17.5 million and $16.1 million in 2004 and 2003,
respectively. Earnings per share was negatively impacted by
after-tax charges related to the integration of the Callaway
Golf and Top-Flite operations in the amounts of $0.26 and
$0.24 per share, in 2004 and 2003, respectively.
|
|
|
Years Ended December 31, 2003 and 2002 |
Net sales increased 3% to $814.0 million for the year ended
December 31, 2003 as compared to $793.2 million for
the year ended December 31, 2002. The overall increase in
net sales is primarily due to a $31.3 million (28%)
increase in the sales of putters, a $28.5 million (11%)
increase in the sales of irons, a $12.4 million (19%)
increase in the sales of golf balls and a $6.2 million
(11%) increase in the sales of accessories and other products as
compared to 2002. The increase in golf ball sales is
attributable to the addition of Top-Flite golf ball sales. The
aggregate increases in net sales were partially offset by a
$57.6 million (19%) decrease in sales of woods in 2003 as
compared to 2002.
The Company believes that adverse economic conditions and
continued economic uncertainty, particularly in the United
States, Japan and other parts of Asia, as well as the military
actions in Iraq and increased competition, had a significant
negative effect upon the Company’s overall net sales in
2003. The Company also believes that its net sales for 2003,
particularly during the first half, were negatively affected by
adverse weather conditions and a continued decrease in the
number of golf rounds played. Golf Datatech has reported that
the number of golf rounds played in the United States declined
2.6% during 2003, as compared to 2002. In addition, the
Company’s net sales are also affected by changes in foreign
currency rates. See below, “Certain Factors Affecting
Callaway Golf Company — Foreign Currency Risk.”
24
Net sales information by product category is summarized as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Driver and fairway woods
|
|
$ |
252.4 |
|
|
$ |
310.0 |
|
|
$ |
(57.6 |
) |
|
|
(19) |
% |
| |
Irons
|
|
|
280.7 |
|
|
|
252.2 |
|
|
|
28.5 |
|
|
|
11 |
% |
| |
Putters
|
|
|
142.8 |
|
|
|
111.5 |
|
|
|
31.3 |
|
|
|
28 |
% |
| |
Golf balls
|
|
|
78.4 |
|
|
|
66.0 |
|
|
|
12.4 |
|
|
|
19 |
% |
| |
Accessories and other*
|
|
|
59.7 |
|
|
|
53.5 |
|
|
|
6.2 |
|
|
|
11 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
814.0 |
|
|
$ |
793.2 |
|
|
$ |
20.8 |
|
|
|
3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Beginning with the first quarter of 2003, the Company records
royalty revenue in net sales. Previously, royalty revenue was
recorded as a component of other income and prior periods have
been reclassified to conform with the current period
presentation. |
The $57.6 million (19%) decrease in net sales of driver and
fairway woods to $252.4 million represents a decrease in
both unit and dollar sales. This decrease was primarily
attributable to a decline in sales of Big Bertha Hawk Eye VFT
Titanium Drivers and Fairway Woods, Big Bertha
Steelhead III Drivers and Fairway Woods, ERC II Forged
Titanium Drivers and Fairway Woods and Big Bertha C4 Drivers.
The declines in sales of these products were expected as the
Company’s products generally sell better in their first
year after introduction. Both Big Bertha Hawk Eye VFT Titanium
Drivers and Fairway Woods and ERC II Forged Titanium
Drivers were introduced in 2001 and Big Bertha C4 Drivers were
introduced in 2002. All of these products were being closed out
in 2003. In addition, 2003 is the second year in the life cycle
for ERC II Forged Titanium Fairway Woods and Big Bertha
Steelhead III Drivers and Fairway Woods. These decreases
were partially offset by sales of Great Big Bertha II
Drivers and Fairway Woods, which were launched during the fourth
quarter of 2002. Sales of Great Big Bertha II Drivers and
Fairway Woods in 2003 exceeded the combined prior year sales of
all other lines of the Company’s titanium driver and
fairway woods products which included Big Bertha Hawk Eye VFT
Titanium Drivers and Fairway Woods and ERC II Forged
Titanium Drivers and Fairway Woods.
The $28.5 million (11%) increase in net sales of irons to
$280.7 million represents an increase in both dollar and
unit sales. The sales growth was due primarily to the January
2003 launch of the Steelhead X-16 Stainless Steel Irons,
including the Steelhead X-16 Pro Series line. This sales growth
was partially offset by a decline in sales of Big Bertha Irons
which were launched in January 2002, Hawkeye VFT irons which
were launched in August 2001, and Steelhead X-14 Irons which
were launched in October 2000 and were being closed out in 2003.
The $31.3 million (28%) increase in net sales of putters to
$142.8 million is primarily attributable to increased sales
of the Company’s Odyssey putters primarily resulting from
the continued success of the Odyssey White Hot 2-Ball putter,
which was introduced in January 2002.
The $12.4 million (19%) increase in net sales of golf balls
to $78.4 million represents an increase in both unit and
dollar sales. The increase is primarily attributable to the
addition of Top-Flite, Strata and Ben Hogan golf ball sales
beginning late in the third quarter of 2003. This increase was
partially offset by a decline in sales of Callaway Golf balls,
which were adversely affected by the decline in rounds played in
2003, the absence of any new product introductions in 2003, and
the uncertainty surrounding the Company’s golf ball
business earlier in the year.
The $6.2 million (11%) increase in net sales of accessories
and other products to $59.7 million is primarily
attributable to increased sales of golf bags, combined with an
increase in royalty revenue from licensed merchandise in 2003 as
compared to 2002.
25
Net sales information by region is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions) | |
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States*
|
|
$ |
449.4 |
|
|
$ |
439.8 |
|
|
$ |
9.6 |
|
|
|
2 |
% |
| |
Europe
|
|
|
145.1 |
|
|
|
136.9 |
|
|
|
8.2 |
|
|
|
6 |
% |
| |
Japan
|
|
|
101.3 |
|
|
|
102.6 |
|
|
|
(1.3 |
) |
|
|
(1) |
% |
| |
Rest of Asia
|
|
|
58.3 |
|
|
|
58.0 |
|
|
|
0.3 |
|
|
|
1 |
% |
| |
Other foreign countries
|
|
|
59.9 |
|
|
|
55.9 |
|
|
|
4.0 |
|
|
|
7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
814.0 |
|
|
$ |
793.2 |
|
|
$ |
20.8 |
|
|
|
3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Beginning with the first quarter of 2003, the Company records
royalty revenue in net sales. Previously, royalty revenue was
recorded as a component of other income and prior periods have
been reclassified to conform with the current period
presentation. |
Net sales in the United States increased $9.6 million (2%)
to $449.4 million during 2003 versus 2002. Overall, the
Company’s sales in regions outside of the United States
increased $11.2 million (3%) to $364.6 million during
2003 versus 2002. This increase in international sales is
primarily attributable to an $8.2 million (6%) increase in
sales in Europe, a $0.3 million (1%) increase in sales in
the Rest of Asia, which includes Korea, and a $4.0 million
(7%) increase in sales in other regions outside of the United
States. These increases were partially offset by a
$1.3 million (1%) decrease in sales in Japan.
For the year ended December 31, 2003, gross profit
decreased to $368.6 million from $400.2 million in the
comparable period of 2002. Gross profit as a percentage of net
sales decreased 5 percentage points to 45% in 2003 as
compared to 2002. The Company’s gross profit percentage in
2003 was unfavorably impacted by the $24.1 million non-cash
charge associated with the integration of Top-Flite (see above
“Top-Flite Acquisition”). The Company’s gross
profit percentage for 2002 was favorably impacted by the
$17.0 million reduction in the Company’s warranty
accrual during the third quarter of 2002 (see above “Change
in Accounting Estimate”). Excluding the effects of the
integration charges and the warranty reserve adjustment, gross
profit in 2003 increased 2% to $392.7 million from
$383.2 million in 2002 and gross profit as a percentage of
net sales remained flat at 48% in 2003 as compared to 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Reported gross profit
|
|
$ |
368.6 |
|
|
$ |
400.2 |
|
|
$ |
(31.6 |
) |
|
|
(8 |
)% |
| |
Non-cash integration charges
|
|
|
24.1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Non-cash warranty reserve adjustment
|
|
|
— |
|
|
|
(17.0 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma gross profit
|
|
$ |
392.7 |
|
|
$ |
383.2 |
|
|
$ |
9.5 |
|
|
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s gross profit percentage (excluding the 2003
integration charges and the 2002 warranty accrual reduction) was
positively impacted by a more favorable sales mix in 2003
combined with the additional inventory obsolescence reserves
established in 2002 on ERC II Drivers and Big Bertha C4
Drivers. These favorable impacts were offset by a decline in
golf ball margins and overall lower average selling prices on
golf club and ball products.
Selling expenses increased $7.5 million (4%) in 2003 to
$207.8 million from $200.3 million in 2002, and were
26% and 25% of net sales, respectively. This increase was
primarily due to the Top-Flite selling expenses incurred in 2003
of $13.9 million. Excluding these Top-Flite selling
expenses, selling expenses in 2003 decreased $6.4 million
as compared to 2002. This decrease was primarily due to a
decrease in employee costs
26
of $5.7 million, advertising expenses of $3.4 million,
promotional club expenses of $2.2 million, mailing and
freight expenses of $0.9 million and travel and
entertainment expenses of $0.6 million. These decreases
were partially offset by increases in depreciation expense of
$3.4 million, other promotional expenses of
$1.5 million and tour expenses of $1.4 million.
General and administrative expenses increased $8.8 million
(16%) in 2003 to $65.4 million from $56.6 million in
2002, and were 8% and 7% of net sales, respectively. This
increase was primarily due to the Top-Flite expenses incurred in
2003 of $7.7 million. Excluding these Top-Flite expenses,
general and administrative expenses in 2003 increased
$1.2 million as compared to 2002. This increase was mainly
attributable to an increase of $1.6 million in deferred
compensation plan expenses.
Research and development expenses decreased $2.7 million
(8%) in 2003 to $29.5 million from $32.2 million in
2002. As a percentage of net sales, the expenses remained
constant at 4%. Excluding Top-Flite expenses of
$1.0 million, research and development expenses in 2003
decreased $3.7 million as compared to 2002. The decrease is
primarily due to a decrease in consulting services of
$1.3 million, depreciation expense of $1.2 million,
and employee costs of $1.1 million.
Interest and other income increased $1.3 million (56%) in
2003 to $3.6 million from $2.3 million in 2002. The
increase is primarily attributable to a $1.9 million
increase in gains on investments to fund the deferred
compensation plan and $0.6 million generated from
litigation settlements. These increases were partially offset by
a $0.5 million decline in interest income and a
$0.5 million decline in foreign currency transaction gains.
Interest expense decreased in 2003 to $1.5 million compared
to $1.7 million in 2002.
During 2003, the Company recorded a provision for income taxes
of $22.4 million. The provision for income tax as a
percentage of income before taxes was 33% in 2003 as compared to
38% in 2002. The effective tax rate was lower in 2003 as
compared to 2002 primarily as a result of the recognition of
atypical tax benefits in the current year income tax provision
related to the statutory U.S export sales incentive.
Net income for the year ended December 31, 2003 decreased
34% to $45.5 million from $69.4 million in 2002.
Earnings per diluted share decreased 34% to $0.68 in 2003 as
compared to $1.03 in 2002. Net income in 2003 was negatively
impacted by the $24.1 million non-cash integration charges
(see above “Top-Flite Acquisition”). Net income in
2002 was positively impacted by the $17.0 million reduction
in the warranty reserve (see above “Change in Accounting
Estimate”). Excluding the $24.1 million non-cash
integration charges recorded in 2003 and the $17.0 million
non-cash warranty reserve adjustment recorded in 2002, the
Company’s net income would have increased 5% to
$61.7 million in 2003 from $58.9 million in 2002 and
diluted earnings per share would have increased 7% to $0.93 in
2003 from $0.87 in 2002.
In connection with Regulation G, the Company provides the
following table which summarizes what net income and earnings
per share would have been had the integration charges and the
warranty reserve
27
adjustment, adjusted for taxes, been excluded from reported
results and reconciles such non-GAAP financial measures to the
most directly comparable GAAP financial measures:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
Growth/(Decline) | |
| |
|
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Dollars | |
|
Percent | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Reported net income
|
|
$ |
45.5 |
|
|
$ |
69.4 |
|
|
$ |
(23.9 |
) |
|
|
(34 |
)% |
| |
Non-cash integration charges
|
|
|
16.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-cash warranty reserve adjustment
|
|
|
— |
|
|
|
(10.5 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
61.7 |
|
|
$ |
58.9 |
|
|
$ |
2.8 |
|
|
|
5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basic earnings per share
|
|
$ |
0.69 |
|
|
$ |
1.04 |
|
|
$ |
(0.35 |
) |
|
|
(34 |
)% |
| |
Non-cash integration charges
|
|
|
0.24 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Non-cash warranty reserve adjustment
|
|
|
— |
|
|
|
(0.16 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic earnings per share
|
|
$ |
0.93 |
|
|
$ |
0.88 |
|
|
$ |
0.05 |
|
|
|
6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported diluted earnings per share
|
|
$ |
0.68 |
|
|
$ |
1.03 |
|
|
$ |
(0.35 |
) |
|
|
(34 |
)% |
| |
Non-cash integration charges
|
|
|
0.25 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Non-cash warranty reserve adjustment
|
|
|
— |
|
|
|
(0.16 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted earnings per share
|
|
$ |
0.93 |
|
|
$ |
0.87 |
|
|
$ |
0.06 |
|
|
|
7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition
Cash and cash equivalents decreased $15.6 million (33%) to
$31.7 million at December 31, 2004, from
$47.3 million at December 31, 2003. This resulted
primarily from cash used in investing activities of
$34.8 million, partially offset by cash provided by
financing activities of $7.9 million, cash provided by
operating activities of $8.5 million and the effect of
exchange rate changes on cash of $2.6 million. Cash
provided by operating activities decreased $110.2 million
to $8.5 million for the year ended December 31, 2004
from $118.7 million in 2003. This decrease was primarily
due to a $55.6 million decrease in net income, as well as a
$40.7 million decrease in income taxes payable. Cash used
in investing activities decreased $133.2 million to
$34.8 million for the year ended December 31, 2004
from $167.9 in 2003. This decrease primarily reflects the
$160.3 million use of cash for the purchase of the
Top-Flite assets in 2003. Cash provided by financing activities
increased $21.4 million to cash provided by financing
activities of $7.9 million in 2004 from cash used in
financing activities of $13.4 million in 2003. The
$21.4 million increase is primarily due to proceeds from
borrowings under the Company’s line of credit, as well as
an increase in proceeds from the issuance of common stock in
connection with the exercise of stock options during the year.
The Company’s net accounts receivable balance increased
$4.5 million to $105.2 million at December 31,
2004 from $100.7 million at December 31, 2003. The
Company’s consolidated days sales outstanding
(“DSO”) increased to 71 days as of December 2004
as compared to 60 days as of December 2003. The increase in
DSO and accounts receivable balance is primarily attributable to
extended payment terms for strategic customers.
The Company’s net inventory decreased $4.2 million to
$181.2 million at December 31, 2004 from
$185.4 million at December 31, 2003. This decrease is
due to the Company’s decrease in inventories of drivers and
fairway woods of $7.6 million, irons and wedges of
$3.8 million, putters of $3.2 million, balls of
$5.4 million and bags and accessories of $3.6 million.
These decreases were partially offset by a $5.0 million
decrease in the Company’s reserve for obsolete inventory,
an increase in Top-Flite inventory of $8.0 million and the
addition of FrogTrader inventory of $4.8 million.
At December 31, 2004, the Company’s net property,
plant and equipment decreased $28.9 million to
$135.9 million from $164.8 million at
December 31, 2003. This decrease is primarily due to
current year depreciation and amortization expense of
$47.8 million and the disposal of $7.7 million of
assets during 2004
28
resulting from the integration of the Callaway Golf and
Top-Flite operations (see above “Top-Flite
Acquisition”). These decreases were partially offset by
current year capital expenditures of $26.0 million.
At December 31, 2004, the Company’s goodwill balance
increased $10.3 million to $30.5 million from
$20.2 million at December 31, 2003. This increase is
primarily due to the $9.1 million of goodwill recorded in
connection with the FrogTrader acquisition in May 2004.
Liquidity and Capital Resources
The Company’s principal sources of liquidity are cash flows
provided by operations and the Company’s credit facilities
in effect from time to time. The Company currently expects this
to continue. Effective November 5, 2004, the Company
amended and restated its line of credit to provide for a new
five year revolving line of credit from Bank of America, N.A.
and certain other lenders (the “Line of Credit”),
providing for revolving loans of up to $250.0 million (with
the possible expansion of the Line of Credit to
$300.0 million upon the satisfaction of certain conditions
and the agreement of the lenders). Actual borrowing availability
under the Line of Credit is effectively limited by the financial
covenants set forth in the agreement governing the Line of
Credit. At December 31, 2004 the maximum amount that could
be borrowed under the Line of Credit was approximately
$141.3 million and $13.0 million of that amount was
outstanding.
Under the Line of Credit, the Company is required to pay certain
fees, including an unused commitment fee of between 17.5 to
35.0 basis points per annum of the unused commitment
amount, with the exact amount determined based upon the
Company’s consolidated leverage ratio and trailing four
quarters earnings before income taxes, depreciation and
amortization (EBITDA) (each as defined in the agreement
governing the Line of Credit). Outstanding borrowings under the
Line of Credit accrue interest, at the Company’s election,
based upon the Company’s consolidated leverage ratio and
trailing four quarters EBITDA, of (i) the higher of
(a) the Federal Funds Rate plus 50.0 basis points or
(b) Bank of America’s prime rate, and in either case,
plus a margin of 00.0 to 75.0 basis points or (ii) the
Eurodollar Rate (as defined in the agreement governing the Line
of Credit) plus a margin of 75.0 to 200.0 basis points. The
Company has agreed that repayment of amounts under the Line of
Credit will be guaranteed by certain of the Company’s
domestic subsidiaries and will be secured by substantially all
of the assets of the Company and such guarantor subsidiaries.
The collateral (other than 65% of the stock of the
Company’s foreign subsidiaries) could be released upon the
satisfaction of certain financial conditions.
The agreement governing the Line of Credit requires the Company
to maintain certain financial covenants, including a maximum
leverage ratio, a minimum asset coverage ratio, a maximum
capitalization ratio, a minimum interest coverage ratio and a
minimum consolidated EBITDA. The agreement also includes certain
other restrictions, including restrictions limiting additional
indebtedness, dividends, stock repurchases, transactions with
affiliates, capital expenditures, asset sales, acquisitions,
mergers, liens and encumbrances and other restrictions. The
agreement also contains other provisions, including affirmative
covenants, representations and warranties and events of default.
As of December 31, 2004, the Company was in compliance with
the covenants and other terms thereof.
The total origination fees incurred in connection with the Line
of Credit were $1.3 million and are being amortized into
interest expense over five years (the term of the Line of Credit
agreement). The unamortized origination fees were
$1.2 million as of December 31, 2004 and have been
included in prepaid and other current assets in the accompanying
consolidated balance sheet.
In 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 the
29
Company of $100.0 million and $50.0 million,
respectively. The following schedule summarizes the status of
the Company’s repurchase programs:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Shares | |
|
Cost Per | |
|
Shares | |
|
Cost Per | |
|
Shares | |
|
Cost Per | |
| |
|
Repurchased | |
|
Share | |
|
Repurchased | |
|
Share | |
|
Repurchased | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Authority Announced in August 2001
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
866 |
|
|
$ |
17.86 |
|
|
Authority Announced in May 2002
|
|
|
353 |
|
|
$ |
17.84 |
|
|
|
373 |
|
|
$ |
12.77 |
|
|
|
1,967 |
|
|
$ |
15.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
353 |
|
|
$ |
17.84 |
|
|
|
373 |
|
|
$ |
12.77 |
|
|
|
2,833 |
|
|
$ |
16.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has completed its August 2001 repurchase program. As
of December 31, 2004, the Company is authorized to
repurchase up to an additional $7.9 million of its Common
Stock under the repurchase program announced in May 2002. The
Company’s repurchases of shares of Common Stock are
recorded at average cost in Common Stock held in treasury and
result in a reduction of shareholders’ equity.
|
|
|
Other Significant Cash and Contractual Obligations |
The following table summarizes certain significant cash
obligations as of December 31, 2004, that will affect the
Company’s future liquidity (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due By Period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Line of credit
|
|
$ |
13.0 |
|
|
$ |
13.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Operating
leases(1)
|
|
|
17.6 |
|
|
|
6.2 |
|
|
|
8.4 |
|
|
|
2.1 |
|
|
|
0.9 |
|
|
Capital
leases(2)
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Unconditional purchase
obligations(3)
|
|
|
121.5 |
|
|
|
28.2 |
|
|
|
51.5 |
|
|
|
35.6 |
|
|
|
6.2 |
|
|
Deferred
compensation(4)
|
|
|
8.5 |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
|
0.7 |
|
|
|
5.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total(5)
|
|
$ |
160.7 |
|
|
$ |
48.5 |
|
|
$ |
61.0 |
|
|
$ |
38.4 |
|
|
$ |
12.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The Company leases certain warehouse, distribution and office
facilities, vehicles and office equipment under operating
leases. The amounts presented in this line item represent
commitments for minimum lease payments under non-cancelable
operating leases and include operating leases assumed as part of
the Top-Flite Acquisition. |
| |
| (2) |
The Company acquired certain capital lease obligations as a
result of the Top-Flite Acquisition primarily related to
computer and telecommunications systems. The amounts presented
in this line item represent commitments for minimum lease
payments under non-cancelable capital leases. |
| |
| (3) |
During the normal course of its business, the Company enters
into agreements to purchase goods and services, including
purchase commitments for production materials, endorsement
agreements with professional golfers and other endorsers,
employment and consulting agreements, and intellectual property
licensing agreements pursuant to which the Company is required
to pay royalty fees. It is not possible to determine the amounts
the Company will ultimately be required to pay under these
agreements as they are subject to many variables including
performance-based bonuses, reductions in payment obligations if
designated minimum performance criteria are not achieved, and
severance arrangements. The amounts listed approximate minimum
purchase obligations, base compensation, and guaranteed minimum
royalty payments the Company is obligated to pay under these
agreements. The actual amounts paid under some of these
agreements may be higher or lower than the amounts included. In
the aggregate, the actual amount paid under these obligations is
likely to be higher than the amounts listed as a result of the
variable nature of these obligations. In addition, the Company
also enters into unconditional purchase obligations with various
vendors and suppliers of goods and services in the normal course
of operations through |
30
|
|
|
purchase orders or other documentation or that are undocumented
except for an invoice. Such unconditional purchase obligations
are generally outstanding for periods less than a year and are
settled by cash payments upon delivery of goods and services and
are not reflected in this line item. |
| |
| (4) |
The Company has an unfunded, non-qualified deferred compensation
plan. The plan allows officers, certain other employees and
directors 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. 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
$9.8 million at December 31, 2004. The liability for
the deferred compensation is included in long-term liabilities
and was $8.7 million at December 31, 2004. |
| |
| (5) |
During the third quarter of 2001, the Company entered into a
derivative commodity instrument 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 that based upon such default, and for other
reasons, the Company was terminating the energy supply contract.
The Company continues to reflect the $19.9 million
derivative valuation account on 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.” The $19.9 million
represents unrealized losses resulting from changes in the
estimated fair value of the contract and does not represent
contractual cash obligations. The Company believes the energy
supply contract has been terminated and, therefore, the Company
does not have any further cash obligations under the contract.
Accordingly, the energy derivative valuation account is not
included in the table. There can be no assurance, however, that
a party will not assert a future claim against the Company or
that a bankruptcy court or arbitrator will not ultimately
nullify the Company’s termination of the contract. No
provision has been made for contingencies or obligations, if
any, under the contract beyond November 2001. See below
Note 13 “Commitments and
Contingencies — Supply of Electricity and Energy
Contracts.” |
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
indemnities to the Company’s customers and licensees in
connection with the use, sale and/or license of Company products
or trademarks, (ii) indemnities to various lessors in
connection with facility leases for certain claims arising from
such facilities or leases, (iii) indemnities to vendors and
service providers pertaining to claims based on the negligence
or willful misconduct of the Company and (iv) indemnities
involving the accuracy of representations and warranties in
certain contracts. In addition, the Company has made contractual
commitments to each of its officers and certain other employees
providing for severance payments upon the termination of
employment. The Company also has consulting agreements that
provide for payment of nominal fees upon the issuance of patents
and/or the commercialization of research results. The Company
has also issued a guarantee in the form of a standby letter of
credit as security for contingent liabilities under certain
workers’ compensation insurance policies. The duration of
these indemnities, commitments and guarantees varies, and in
certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees do not provide for any
limitation on the maximum amount of future payments the Company
could be obligated to make. Historically, costs incurred to
settle claims related to indemnities have not been material to
the Company’s financial position, results of operations or
cash flows. In addition, the Company believes the likelihood is
remote that material payments will be required under the
commitments and guarantees described above. The fair value of
indemnities, commitments and guarantees that the Company issued
during the fiscal year ended December 31, 2004 was not
material to the Company’s financial position, results of
operations or cash flows.
In addition to the contractual obligations listed above, the
Company’s liquidity could also be adversely affected by an
unfavorable outcome with respect to claims and litigation that
the Company is subject to from time to time. See Note 13 to
the Company’s Consolidated Financial Statements.
31
Based upon its current operating plan, analysis of its
consolidated financial position and projected future results of
operations, the Company believes that its operating cash flows,
together with its credit facility, will be sufficient to finance
current operating requirements, planned capital expenditures,
contractual obligations and commercial commitments, for the next
twelve months. There can be no assurance, however, that future
industry specific or other developments, general economic trends
or other matters will not adversely affect the Company’s
operations or its ability to meet its future cash requirements
(see below “Certain Factors Affecting Callaway Golf
Company”).
The Company does not currently have any material commitments for
capital expenditures.
|
|
|
Off-Balance Sheet Arrangements |
At December 31, 2004 and 2003, the Company did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
|
|
|
Certain Factors Affecting Callaway Golf Company |
The financial statements contained in this report and the
related discussion describe and analyze the Company’s
financial performance and condition for the periods presented.
For the most part, this information is historical. The
Company’s prior results, however, are not necessarily
indicative of the Company’s future performance or financial
condition. The Company has also included certain forward-looking
statements concerning the Company’s future performance or
financial condition. These forward-looking statements are based
upon current information and expectations and actual results
could differ materially. The Company therefore has included the
following discussion of certain factors that could cause the
Company’s future performance or financial condition to
differ materially from its prior performance or financial
condition or from management’s expectations or estimates of
the Company’s future performance or financial condition.
These factors, among others, should be considered in assessing
the Company’s future prospects and prior to making an
investment decision with respect to the Company’s stock.
|
|
|
Market Acceptance of Products |
A golf equipment manufacturer’s ability to compete is in
part dependent upon its ability to satisfy the various
subjective requirements of golfers, including a golf club’s
and golf ball’s look and “feel,” and the level of
acceptance that a golf club and ball has among professional and
recreational golfers. The subjective preferences of golf club
and golf ball purchasers are difficult to predict and may be
subject to rapid and unanticipated changes. In addition, the
Company’s products have tended to incorporate significant
innovations in design and manufacture, which have often, but not
always, resulted in higher prices for the Company’s
products relative to other products in the marketplace. There
can be no assurance that a significant percentage of the public
will always be willing to pay premium prices for golf equipment
or that the Company will be able to design and manufacture
products that achieve market acceptance. In general, there can
be no assurance as to whether or how long the Company’s
golf clubs and golf balls will achieve and maintain market
acceptance and therefore there can be no assurance that the
demand for the Company’s products will permit the Company
to experience growth in sales, or maintain historical levels of
sales, in the future.
|
|
|
New Product Introduction and Product Cyclicality |
The Company believes that the introduction of new, innovative
golf clubs and golf balls is important to its future success. A
major portion of the Company’s revenues is generated by
products that are less than two years old. The Company faces
certain risks associated with such a strategy. For example, in
the golf industry, new models and basic design changes in golf
equipment are frequently met with consumer rejection. In
32
addition, prior successful designs have been rendered obsolete
within a relatively short period of time as new products are
introduced into the marketplace. Further, any new products that
retail at a lower price than prior products may negatively
impact the Company’s revenues unless unit sales increase.
The rapid introduction of new golf club or golf ball products by
the Company has resulted in close-outs of existing inventories
at both the wholesale and retail levels. Such close-outs have
resulted in reduced margins on the sale of older products, as
well as reduced sales of new products, given the availability of
older products at lower prices.
The Company’s newly introduced golf club products
generally, but not always, have a product life cycle of up to
two years. These products generally sell significantly better in
the first year after introduction as compared to the second
year. In certain markets, such as Japan, the decline in sales
occurs sooner in the product cycle and is more significant. The
Company’s fusion woods generally sell at higher price
points than its titanium metal woods, and its titanium metal
woods generally sell at higher price points than its steel metal
woods. Historically, the Company’s wood products generally
have achieved better gross margins than its iron products.
However, price compression in the woods market has made this
differential less, and at times gross margins on woods may be
less than other products. The Company’s sales and gross
margins for a particular period may be negatively or positively
affected by the mix of new products sold in such period.
The Company plans its manufacturing capacity based upon the
forecasted demand for its products. The nature of the
Company’s business makes it difficult to quickly adjust its
manufacturing capacity if actual demand for its products exceeds
or is less than forecasted demand. If actual demand for its
products exceeds the forecasted demand, the Company may not be
able to produce sufficient quantities of new products in time to
fulfill actual demand, which could limit the Company’s
sales and adversely affect its financial performance. On the
other hand, if actual demand is less than the forecasted demand
for its products, this could result in less than optimum
capacity usage and/or in excess inventories and related
obsolescence charges that could adversely affect the
Company’s financial performance.
|
|
|
Dependence on Certain Suppliers and Materials |
The Company is dependent on 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 believes that suitable clubheads
and shafts could be obtained from other manufacturers in the
event its regular suppliers (because of financial difficulties
or otherwise) are unable or fail to provide suitable components.
However, there could be a significant production delay or
disruption caused by the inability of current suppliers to
deliver or the transition to other suppliers, which in turn
could have a material adverse impact on the Company’s
results of operations. The Company is also single-sourced or
dependent on a limited number of suppliers for the materials it
uses to make its golf balls. Many of the materials are
customized for the Company. Any delay or interruption in such
supplies could have a material adverse impact upon the
Company’s golf ball business. If the Company did experience
any such delays or interruptions, there is no assurance that the
Company would be able to find adequate alternative suppliers at
a reasonable cost or without significant disruption to its
business.
The Company’s size has made it a large consumer of certain
materials, including steel, titanium alloys, carbon fiber and
rubber. The Company does not make these materials itself, and
must rely on its ability to obtain adequate supplies in the
world marketplace in competition with other users of such
materials. While the Company has been successful in obtaining
its requirements for such materials thus far, there can be no
assurance that it always will be able to do so at a reasonable
price. An interruption in the supply of the materials used by
the Company or a significant change in costs could have a
material adverse effect on the Company.
The Company uses United Parcel Service (“UPS”) for
substantially all ground shipments of products to its
U.S. customers. The Company uses air carriers and shipping
services for most of its international shipments of products.
Any significant interruption in UPS, air carrier or shipping
services could have a material adverse
33
effect upon the Company’s ability to deliver its products
to its customers. If there were any significant interruption in
such services, there is no assurance that 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 interruption in UPS services, air
carrier services or shipping services into or out of the United
States could have a material adverse effect upon the Company
(see below “International Risks”).
|
|
|
Dependence on Energy Resources |
The Company’s golf club and golf ball manufacturing
facilities in California use, among other resources, significant
quantities of electricity to operate. In 2001, some companies in
California, including the Company, experienced periods of
blackouts during which electricity was not available. If the
Company were to experience such blackouts again, there is no
assurance that it would be able to obtain alternative power
supplies at reasonable prices. An interruption in the supply of
electricity or a significant increase in the cost of electricity
could have a significant adverse effect upon the Company’s
results of operations.
Golf Clubs. The golf club business is highly competitive,
and is served by a number of well-established and well-financed
companies with recognized brand names, as well as new companies
with popular products. New product introductions, price
reductions, consignment sales, extended payment terms,
“close-outs” (including close-outs of products that
were recently commercially successful) and increased tour and
advertising spending by competitors continue to generate
increased market competition. Furthermore, continued price
compression in the club industry for new clubs could have a
significant adverse affect on the Company’s pre-owned club
business as the gap between the cost of a new club and a
pre-owned club lessens. 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.
Golf Balls. The golf ball business is also highly
competitive and may be becoming even more competitive. There are
a number of well-established and well-financed competitors,
including one competitor with an estimated U.S. market
share of approximately 50%. As competition in this business
increases, many of these competitors are increasing advertising,
tour or other promotional support. This increased competition
has resulted in significant expenses for the Company in both
tour and advertising support and product development. Unless
there is a change in competitive conditions, these competitive
pressures and increased costs will continue to adversely affect
the profitability of the Company’s golf ball business.
On a consolidated basis, no one customer that distributes the
Company’s golf clubs or balls in the United States
accounted for more than 4% of the Company’s revenues in
2004, 2003 or 2002. On a segment basis, the Company’s golf
ball customer base is much more concentrated than its golf club
customer base. In 2004, the top five golf ball customers
accounted for approximately 25% of the Company’s total golf
ball sales. A loss of one or more of these customers could have
a significant adverse effect upon the Company’s golf ball
sales.
|
|
|
Adverse Global Economic Conditions |
The Company sells golf clubs, golf balls and golf accessories.
These products are recreational in nature and are therefore
discretionary purchases for consumers. Consumers are generally
more willing to make discretionary purchases of golf products
during favorable economic conditions and when consumers are
feeling confident and prosperous. Adverse economic conditions in
the United States or in the Company’s international markets
(which represent almost half of the Company’s total sales),
or a decrease in prosperity among consumers, or even a decrease
in consumer confidence as a result of anticipated adverse
economic conditions, could cause consumers to forgo or to
postpone purchasing new golf products, which could have a
material adverse effect upon the Company.
34
|
|
|
Terrorist Activity and Armed Conflict |
Terrorist activities and armed conflicts in recent years (such
as the attacks on the World Trade Center and the Pentagon, the
incidents of Anthrax poisoning and the military actions in the
Middle East, including the war in Iraq), as well as the threat
of future conflict, have had a significant adverse effect upon
the Company’s business. Any such additional events would
likely have an adverse effect upon the world economy and would
likely adversely affect the level of demand for the
Company’s products as consumers’ attention and
interest are diverted from golf and become focused on these
events and the economic, political, and public safety issues and
concerns associated with such events. Also, such events could
adversely affect the Company’s ability to manage its supply
and delivery logistics. If such events caused a significant
disruption in domestic or international air, ground or sea
shipments, the Company’s ability to obtain the materials
necessary to produce and sell its products and to deliver
customer orders also would be materially adversely affected.
Furthermore, such events can negatively impact tourism, which
could adversely affect the Company’s sales to retailers at
resorts and other vacation destinations.
|
|
|
Natural Disasters and Pandemic Diseases |
The occurrence of a natural disaster, such as an earthquake or
hurricane, or the outbreak of a pandemic disease, such as Severe
Acute Respiratory Syndrome (“SARS”) or the Avian Flu,
could significantly adversely affect the Company’s
business. A natural disaster or a pandemic disease could
significantly adversely affect both the demand for the
Company’s products as well as the supply of the components
used to make the Company’s products. Demand for golf
products could be negatively affected as consumers in the
affected regions restrict their recreational activities and as
tourism to those areas declines. If the Company’s suppliers
experienced a significant disruption in their business as a
result of a natural disaster or pandemic disease, the
Company’s ability to obtain the necessary components to
make its products could be significantly adversely affected. In
addition, the occurrence of a natural disaster or the outbreak
of a pandemic disease generally restricts the travel to and from
the affected areas, making it more difficult in general to
manage the Company’s international operations.
A significant portion of the Company’s sales are
international sales. As a result, the Company conducts
transactions in approximately 12 currencies worldwide.
Conducting business in such various currencies increases the
Company’s exposure to fluctuations in foreign currency
exchange rates relative to the U.S. dollar.
The Company’s financial results are reported in
U.S. dollars. As a result, transactions conducted in
foreign currencies must be translated into U.S. dollars for
reporting purposes based upon the applicable foreign currency
exchange rates. Fluctuations in these foreign currency exchange
rates therefore may positively or negatively affect the
Company’s reported financial results.
The effect of the translation of foreign currencies on the
Company’s financial results can be significant. The Company
therefore engages in certain hedging activities to mitigate over
time the impact of the translation of foreign currencies on the
Company’s financial results. The Company’s hedging
activities reduce, but do not eliminate, the effects of foreign
currency fluctuations. Factors that could affect the
effectiveness of the Company’s hedging activities include
accuracy of sales forecasts, volatility of currency markets and
the availability of hedging instruments. Since the hedging
activities are designed to reduce volatility, they not only
reduce the negative impact of a stronger U.S. dollar but
they also reduce the positive impact of a weaker
U.S. dollar. For the effect of the Company’s hedging
activities during the current reporting periods, see below
“Quantitative and Qualitative Disclosures about Market
Risk.” The Company’s future financial results could be
significantly affected by the value of the U.S. dollar in
relation to the foreign currencies in which the Company conducts
business. The degree to which the Company’s financial
results are affected will depend in part upon the effectiveness
or ineffectiveness of the Company’s hedging activities.
35
In addition, foreign currency fluctuations can also affect the
prices at which products are sold in the Company’s
international markets. The Company therefore adjusts its pricing
based in part upon fluctuations in foreign currency exchange
rates. Significant unanticipated changes in foreign currency
exchange rates make it more difficult for the Company to manage
pricing in its international markets. If the Company is unable
to adjust its pricing in a timely manner to counteract the
effects of foreign currency fluctuations, the Company’s
pricing may not be competitive in the marketplace and the
Company’s financial results in its international markets
could be adversely affected.
In order for the Company to significantly grow its sales of golf
clubs or golf balls, the Company must either increase its share
of the market for golf clubs or balls, or the market for golf
clubs or balls must grow. The Company already has a significant
share of worldwide golf club sales and the Company’s golf
ball products achieved the number two retail market share in
2004. Therefore, opportunities for additional market share may
be limited. The Company does not believe there has been any
material increase in the number of golfers worldwide in over
four years. Furthermore, the Company believes that overall
worldwide golf club sales have generally not experienced
substantial growth in the past several years. There is no
assurance that the overall dollar volume of worldwide golf club
or ball sales will grow, or that it will not decline, in the
future.
|
|
|
Seasonality and Adverse Weather Conditions |
In addition to the effects of product cycles described above,
the Company’s business is also subject to the effects of
seasonal fluctuations. The Company’s first quarter sales
generally represent the Company’s sell-in to the golf
retail channel of its golf club products for the new golf
season. Orders for many of these sales are received during the
fourth quarter of the prior year. The Company’s second and
third quarter sales generally represent re-order business for
golf clubs. Sales of golf clubs during the second and third
quarters are significantly affected not only by the sell-through
of the Company’s products that were sold into the channel
during the first quarter but also by the sell-through of the
products of the Company’s competitors. Retailers are
sometimes reluctant to re-order the Company’s products in
significant quantity when they already have excess inventory of
the Company’s or its competitors’ products. The
Company’s sales of golf balls are generally associated with
the level of rounds played in the areas where the Company’s
products are sold. Therefore, golf ball sales tend to be greater
in the second and third quarters, when the weather is good in
most of the Company’s key markets and rounds played are up.
Golf ball sales are also stimulated by product introductions as
the retail channel takes on initial supplies. Like golf clubs,
re-orders of golf balls depend on the rate of sell-through. The
Company’s sales during the fourth quarter are generally
significantly less than the other quarters because in general in
many of the Company’s principal markets less people are
playing golf during that time of year due to cold weather.
Furthermore, it previously was the Company’s practice to
announce its new product line at the beginning of each calendar
year. In recent years, the Company has departed from that
practice and now generally announces its new product line in the
fourth quarter to allow retailers to plan better. Such early
announcements of new products could cause golfers, and therefore
the Company’s customers, to defer purchasing additional
golf equipment until the Company’s new products are
available. Such deferments could have a material adverse effect
upon sales of the Company’s current products and/or result
in close-out sales at reduced prices.
Because of these seasonal trends, the Company’s business
can be significantly adversely affected by unusual or severe
weather conditions. Unfavorable weather conditions generally
result in less golf rounds played, which generally results in
less demand for golf clubs and golf balls. Furthermore,
catastrophic storms, such as the hurricanes in Florida and along
the east coast in late 2004, can negatively affect golf rounds
played not only during the storms but also for a significant
period of time afterward as storm damaged golf courses are
repaired and golfers focus on repairing the damage to their
homes, businesses and communities. Consequently, sustained
adverse weather conditions, especially during the warm weather
months, could materially affect the Company’s sales.
36
|
|
|
Conformance with the Rules of Golf |
New golf club and golf ball products generally seek to satisfy
the standards established by the USGA and R&A because these
standards are generally followed by golfers within their
respective jurisdictions. The USGA rules are generally followed
in the United States, Canada and Mexico, and the R&A rules
are generally followed in most other countries throughout the
world.
The Rules of Golf as published by the R&A and the USGA are
virtually the same except with respect to the regulation of
“driving clubs.” The R&A rules currently permit
driver clubheads with greater flexibility (as measured by a
specific test) than are permitted under the USGA rules. As a
result, in jurisdictions where the R&A rules are followed,
the Company (like many of its competitors) has marketed and sold
drivers that conform to the R&A rules but not the USGA rules
(the “Plus Drivers”). In those jurisdictions where the
USGA rules are followed, the Company markets and sells its
standard drivers that conform to both the R&A and the USGA
rules. All of the Company’s other products are believed to
conform to both the USGA and R&A rules.
Effective January 1, 2008, the more flexible clubheads such
as those used for the Plus Drivers will not be conforming under
the generally applicable Rules of Golf as published by the
R&A. It is not clear what effect the change in rules will
have upon demand for Plus Drivers in R&A jurisdictions as
2008 approaches or subsequent to the implementation of the new
restrictions. It is possible that some jurisdictions and/or
golfers will choose not to follow the R&A’s changes and
will instead continue to use Plus Drivers. This uncertainty
adversely affects the Company’s research and development
and manufacturing operations which must plan and commit
resources years in advance of a new product release. If the
Company does not accurately anticipate consumer reaction to the
new rule changes, the Company’s sales in such jurisdictions
could be adversely affected and the Company could be required to
invest significant resources to change its product offerings at
such time. The Company also believes that the general confusion
created by the ruling bodies of golf as to what is a conforming
or non-conforming driver and the limits imposed on new driver
technology generally have hurt sales of drivers.
There is no assurance that the Company’s future products
will satisfy USGA and/or R&A standards, 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 or the
Company’s brand. If a change in rules were adopted and
caused one or more of the Company’s current products to be
non-conforming, the Company’s sales of such products could
be adversely affected. Furthermore, any such new rules could
restrict the Company’s ability to develop new products.
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Golf Professional Endorsements |
The Company establishes relationships with professional golfers
in order to evaluate and promote Callaway Golf, Odyssey,
Top-Flite and Ben Hogan branded products. The Company has
entered into endorsement arrangements with members of the
various professional tours, including the Champions Tour, the
PGA Tour, the LPGA Tour, the PGA European Tour, the Japan Golf
Tour and the Nationwide Tour. While most professional golfers
fulfill their contractual obligations, some have been known to
stop using a sponsor’s products despite contractual
commitments. If certain of the 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 or lack of endorsement.
The Company believes that professional usage of its golf clubs
and golf balls contributes to retail sales. The Company
therefore spends a significant amount of money to secure
professional usage of its products. Many other companies,
however, also aggressively seek the patronage of these
professionals and offer many inducements, including significant
cash rewards and specially designed products. There is a great
deal of competition to secure the representation of tour
professionals. As a result, it is becoming increasingly
difficult and more expensive to attract and retain such tour
professionals. The inducements offered by other companies could
result in a decrease in usage of the Company’s products by
professional golfers or limit the Company’s ability to
attract other tour professionals. A decline in the level of
professional usage of the Company’s products could have a
material adverse effect on the Company’s sales and business.
37
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Intellectual Property and Proprietary Rights |
The golf club industry, in general, has been characterized by
widespread imitation of popular club designs. 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 asserts its rights
against infringers of its copyrights, 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 copyrights, patents,
trademarks, or trade dress.
An increasing number of the Company’s competitors have,
like the Company itself, sought to obtain patent, trademark,
copyright or other protection of their proprietary rights and
designs for golf clubs and golf balls. As the Company develops
new products, it attempts to avoid infringing the valid patents
and other intellectual property rights of others. Before
introducing new products, the Company’s legal staff
evaluates the patents and other intellectual property rights of
others to determine if changes are required to avoid infringing
any valid intellectual property rights that could be asserted
against the Company’s new product offerings. From time to
time, others have contacted or may contact the Company to claim
that they have proprietary rights that have been infringed upon
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 a
result of any claims of infringement. No assurance can be given,
however, that the Company will not be adversely affected in the
future by the assertion of intellectual property rights
belonging to others. This effect could include alteration or
withdrawal of existing products and delayed introduction of new
products.
Various patents have been issued to the Company’s
competitors in the golf ball industry. As the Company develops
its golf ball products, it attempts to avoid infringing valid
patents or other intellectual property rights. Despite these
attempts, it cannot be guaranteed that competitors will not
assert and/or a court will not find that the Company’s golf
balls infringe certain patent or other rights of competitors. If
the Company’s golf balls are found to infringe on protected
technology, there is no assurance that the Company would be able
to obtain a license to use such technology, and it could incur
substantial costs to redesign them and/or defend legal actions.
The Company has procedures to maintain the secrecy of its
confidential business information. These procedures include
criteria for dissemination of information and written
confidentiality agreements with employees and suppliers.
Suppliers, when engaged in joint research projects, are required
to enter into additional confidentiality agreements. While these
efforts are taken seriously, there can be no assurance that
these measures will prove adequate in all instances to protect
the Company’s confidential information.
The Company’s Code of Conduct prohibits misappropriation of
trade secrets and confidential information of third parties. The
Code of Conduct is contained in the Company’s Employee
Handbook and is also available on the Company’s website.
Employees also sign an Employee Invention and Confidentiality
Agreement prohibiting disclosure of trade secrets and
confidential information from third parties. Periodic training
is provided to employees on this topic as well. Despite taking
these steps, as well as others, the Company cannot guarantee
that these measures will be adequate in all instances to prevent
misappropriation of trade secrets from third parties or the
accusation by a third party that such misappropriation has taken
place.
The Company licenses its trademarks to third party licensees who
produce, market and sell their products bearing the
Company’s trademarks. The Company chooses its licensees
carefully and imposes upon such licensees various restrictions
on the products, and on the manner, on which such trademarks may
be used. In addition, the Company requires its licensees to
abide by certain standards of conduct and the laws and
regulations of the jurisdictions in which they do business.
However, if a licensee fails to adhere to these requirements,
the Company’s brand could be damaged by the use or misuse
of the Company’s trademarks in connection with its
licensees’ products.
38
Golf Clubs. The Company supports all of its golf clubs
with a limited two year written warranty. Since the Company does
not rely upon traditional designs in the development of its golf
clubs, its products may be more likely to develop unanticipated
problems than those of many of its competitors that use
traditional designs. For example, clubs have been returned with
cracked clubheads, broken graphite shafts and loose medallions.
While any breakage or warranty problems are deemed significant
by the Company, the incidence of defective clubs returned to
date has not been material in relation to the volume of clubs
that have been sold.
The Company monitors the level and nature of any golf club
breakage and, where appropriate, seeks to incorporate design and
production changes to assure its customers of the highest
quality available in the market. Significant increases in the
incidence of breakage or other product problems may adversely
affect the Company’s sales and image with golfers. The
Company believes that it has adequate reserves for warranty
claims. If the Company were to experience an unusually high
incidence of breakage or other warranty problems in excess of
these reserves, the Company’s financial results would be
adversely affected. See above, “Critical Accounting
Policies and Estimates — Warranty.”
Golf Balls. The Company has not experienced significant
returns of defective golf balls, and in light of the quality
control procedures implemented in the production of its golf
balls, the Company does not expect a significant amount of
defective ball returns. However, if future returns of defective
golf balls were significant, it could have a material adverse
effect upon the Company’s golf ball business.
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“Gray Market” Distribution |
Some quantities of the Company’s products find their way to
unapproved outlets or distribution channels. This “gray
market” for the Company’s products can undermine
authorized retailers and foreign wholesale distributors who
promote and support the Company’s products, and can injure
the Company’s image in the minds of its customers and
consumers. On the other hand, stopping such commerce could
result in a potential decrease in sales to those customers who
are selling the Company’s products to unauthorized
distributors and/or an increase in sales returns over historical
levels. While the Company has taken some lawful steps to limit
commerce of its products in the “gray market” in both
the U.S. and abroad, it has not stopped such commerce.
The Company’s management believes that controlling the
distribution of its products in certain major markets in the
world has been and will be an element in the future growth and
success of the Company. The Company sells and distributes its
products directly (as opposed to through third party
distributors) in many key international 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 components in the United States
and the Company has increasingly become more reliant on
suppliers and vendors located outside of the United States. The
operation of foreign distribution in the Company’s
international markets, as well as the management of
relationships with international suppliers and vendors, will
continue to require the dedication of management and other
Company resources.
As a result of this international business, the Company is
exposed to increased risks inherent in conducting business
outside of the United States. In addition to foreign currency
risks, these risks include (i) increased difficulty in
protecting the Company’s intellectual property rights and
trade secrets, (ii) unexpected government action or changes
in legal or regulatory requirements, (iii) social, economic
or political instability, (iv) the effects of any
anti-American sentiments on the Company’s brands or sales
of the Company’s products, (v) increased difficulty in
controlling and monitoring foreign operations from the United
States, including increased difficulty in identifying and
recruiting qualified personnel for its foreign operations, and
(vi) increased exposure to interruptions in air carrier or
shipping services, which interruptions could significantly
adversely affect the Company’s ability to obtain timely
delivery of components from international suppliers or to timely
deliver its products to international customers. Although the
Company believes the
39
benefits of conducting business internationally outweigh these
risks, any significant adverse change in circumstances or
conditions could have a significant adverse effect upon the
Company’s operations and therefore financial performance
and condition.
The Company primarily sells its products to golf equipment
retailers directly and through wholly-owned domestic and foreign
subsidiaries, and to foreign distributors. The Company performs
ongoing credit evaluations of its customers’ financial
condition and generally requires no collateral from these
customers. Historically, the Company’s bad debt expense has
been low. However, a downturn in the retail golf equipment
market could result in increased delinquent or uncollectible
accounts for some of the Company’s significant customers. A
failure by the Company’s customers to pay a significant
portion of outstanding account receivable balances would
adversely impact the Company’s performance and financial
condition.
All of the Company’s major operations, including
manufacturing, distribution, sales and accounting, are dependent
upon the Company’s information computer systems. The
Callaway Golf business information systems and the acquired
Top-Flite information systems are different and the Company is
therefore currently operating multiple platforms. The Company
has made a decision to integrate the systems worldwide. This
large scale project is currently underway. Any significant
disruption in the operation of such systems, as a result of an
internal system malfunction, infection from an external computer
virus, or complications in connection with any attempted
integration of the two systems, or otherwise, would have a
significant adverse effect upon the Company’s ability to
operate its business. Although the Company has taken steps to
mitigate the effect of any such disruptions, there is no
assurance that such steps would be adequate in a particular
situation. Consequently, a significant or extended disruption in
the operation of the Company’s information systems could
have a material adverse effect upon the Company’s
operations and therefore financial performance and condition.
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Change In Accounting Rules |
The Company currently and historically has accounted for its
stock based compensation under Accounting Principles Board
Opinion No. 25 (“APB No. 25”). Under APB
No. 25, the Company is not required to record compensation
expense for equity-based awards granted to employees. The
Financial Accounting Standards Board has recently issued rules
which require the Company to begin recording compensation
expense for such awards based upon the fair value of such awards
for all periods beginning after June 15, 2005. Such noncash
compensation expense is anticipated to have a significant
adverse effect upon the Company’s reported earnings.
Although the Company has historically provided in the notes to
its financial statements pro forma earnings information showing
what the Company’s results would have been had the Company
been recording compensation expense for such awards, the amount
of such expense was not reflected in its financial results.
Consequently, when the Company begins recording such
compensation expense in 2005, the period over period comparisons
will be significantly affected by the inclusion of such expense
in 2005 and the absence of such expense from 2004 and prior
periods. If investors do not appropriately consider these
changes in accounting rules, the price at which the
Company’s stock is traded could be significantly adversely
affected.
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Analyst Guidance, Media Reports and Market
Volatility |
The Company’s stock is traded publicly, principally on the
New York Stock Exchange. As a result, at any given time, there
are usually various securities analysts which follow the Company
and issue reports on the Company. These reports include
information about the Company’s historical financial
results as well as the analysts’ estimates of the
Company’s future performance. The analysts’ estimates
are based upon their own opinions and are often different from
the Company’s own estimates or expectations. The Company
has a policy against confirming financial forecasts or
projections issued by analysts and any reports issued by such
40
analysts are not the responsibility of the Company. Investors
should not assume that the Company agrees with any report issued
by any analyst or with any statements, projections, forecasts or
opinions contained in any such report. In addition to analyst
reports, the media also reports its opinion on the
Company’s results. These media reports are often written
quickly so as to be the first to the news wire and in an attempt
to garner attention often lead with headlines that are not
representative of the substance of the article. Furthermore,
these media reports, which are often written by writers who are
not financial experts, reflect only the writers’ views of
the Company’s results. Investors should not assume that the
Company agrees with such media reports or the manner in which
the Company’s results are presented or characterized in
such reports.
The price at which the Company’s stock is traded on the
securities exchanges is based upon many factors. In the
short-term, the price at which the Company’s stock is
traded can be significantly affected, positively or negatively,
by analysts’ reports and media reports, regardless of the
accuracy of such reports. Over the long-term, the price at which
the Company’s stock is traded should tend to reflect the
Company’s performance irrespective of such reports.
The Company may from time to time provide investors with
estimates of anticipated revenues and earnings per share. If the
Company provides such estimates, they will be based upon the
information available and management’s expectations at the
time such estimates are made and actual results could differ
materially. See “Important Notice to Investors” on the
inside cover of this report.
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| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The Company uses derivative financial instruments for hedging
purposes to limit its exposure to changes in foreign exchange
rates. Transactions involving these financial instruments are
with credit-worthy firms. The use of these instruments exposes
the Company to market and credit risk which may at times be
concentrated with certain counterparties, although counterparty
nonperformance is not anticipated. The Company is also exposed
to interest rate risk from its credit facility.
Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to
foreign currency exchange rate risks (see Note 8 to the
Company’s Consolidated Condensed Financial Statements) that
could impact the Company’s results of operations. The
Company’s risk management strategy includes the use of
derivative financial instruments, including forwards and
purchased options, to hedge certain of these exposures. The
Company’s objective is to offset gains and losses resulting
from these exposures with gains and losses on the derivative
contracts used to hedge them, thereby reducing volatility of
earnings. The Company does not enter into any trading or
speculative positions with regard to foreign currency related
derivative instruments.
The Company is exposed to foreign currency exchange rate risk
inherent primarily in its sales commitments, anticipated sales
and assets and liabilities denominated in currencies other than
the U.S. dollar. The Company transacts business in
12 currencies worldwide, of which the most significant to
its operations are the European currencies, Japanese Yen, Korean
Won, Canadian Dollar, and Australian Dollar. For most
currencies, the Company is a net receiver of foreign currencies
and, therefore, benefits from a weaker U.S. dollar and is
adversely affected by a stronger U.S. dollar relative to
those foreign currencies in which the Company transacts
significant amounts of business.
The Company enters into foreign exchange contracts to hedge
against exposure to changes in foreign currency exchange rates.
Such contracts are designated at inception to the related
foreign currency exposures being hedged, which include
anticipated intercompany sales of inventory denominated in
foreign currencies, payments due on intercompany transactions
from certain wholly-owned foreign subsidiaries, and anticipated
sales by the Company’s wholly-owned European subsidiary for
certain Euro-denominated transactions. Hedged transactions are
denominated primarily in British Pounds, Euros, Japanese Yen,
Korean Won, Canadian Dollars and Australian Dollars. To achieve
hedge accounting, contracts must reduce the foreign currency
exchange rate risk otherwise inherent in the amount and duration
of the hedged exposures 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
41
currencies using forward foreign currency exchange rate
contracts and put or call options. Foreign currency derivatives
are used only to meet the Company’s objectives of
minimizing variability in the Company’s operating results
arising from foreign exchange rate movements. The Company does
not enter into foreign exchange contracts for speculative
purposes. Hedging contracts mature within twelve months from
their inception.
At December 31, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts were
approximately $52.7 million, $91.2 million and
$134.8 million respectively. The Company estimates the fair
values of derivatives 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, 2004,
current liabilities related to the fair value of foreign
currency-related derivatives were $3.0 million. There were
no current assets related to the fair values of foreign
currency-related derivatives. At December 31, 2003, the
fair values of foreign currency-related derivatives were
recorded as current assets of $0.05 million and current
liabilities of $0.8 million.
At December 31, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts designated as
cash flow hedges were approximately $0, $44.4 million and
$84.8 million, respectively. For derivative instruments
that are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative
instrument is initially recorded in accumulated other
comprehensive income (“OCI”) as a separate component
of shareholders’ equity and subsequently reclassified into
earnings in the period during which the hedged transaction is
recognized.
During the years ended December 31, 2004 and 2003, no gains
or losses were reclassified into earnings as a result of the
discontinuance of cash flow hedges. During the year ended
December 30, 2002, gains of $0.2 million were
reclassified into earnings as a result of the discontinuance of
cash flow hedges.
The ineffective portion of the gain or loss for derivative
instruments that is designated and qualifies as a cash flow
hedge is immediately reported as a component of interest and
other income. For foreign currency contracts designated as cash
flow hedges, hedge effectiveness is measured using the spot
rate. Changes in the spot-forward differential are excluded from
the test of hedging effectiveness and are recorded currently in
earnings as a component of interest and other income. During the
years ended December 31, 2004, 2003 and 2002, the Company
recorded a net gain/loss of $0.1 million loss,
$0.04 million gain and $0.3 million gain,
respectively, as a result of changes in the spot-forward
differential. Assessments of hedge effectiveness are performed
using the dollar offset method and applying a hedge
effectiveness ratio between 80% and 125%. Given that both the
hedged item and the hedging 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, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts used to hedge
outstanding balance sheet exposures were approximately
$52.7 million, $46.8 million and $49.9 million,
respectively. The gains and losses on foreign currency contracts
used to hedge balance sheet exposures are recognized as a
component of interest and other income in the same period as the
remeasurement gain and loss of the related foreign currency
denominated assets and liabilities and thus offset these gains
and losses. During the years ended December 31, 2004, 2003
and 2002, the Company recorded net losses of $4.6 million,
$6.8 million and $8.1 million, respectively, due to
net realized and unrealized gains and losses on contracts used
to hedge balance sheet exposures.
Sensitivity analysis is the measurement of potential loss in
future earnings of market sensitive instruments resulting from
one or more selected hypothetical changes in interest rates or
foreign currency values. The Company used a sensitivity analysis
model to quantify the estimated potential effect of unfavorable
movements of 10% in foreign currencies to which the Company was
exposed at December 31, 2004 through its derivative
financial instruments.
The sensitivity analysis model is a risk analysis tool and does
not purport to represent actual losses in earnings that will be
incurred by the Company, nor does it consider the potential
effect of favorable changes in market rates. It also does not
represent the maximum possible loss that may occur. Actual
future gains and
42
losses will differ from those estimated because of changes or
differences in market rates and interrelationships, hedging
instruments and hedge percentages, timing and other factors.
The estimated maximum one-day loss from the Company’s
foreign-currency derivative financial instruments, calculated
using the sensitivity analysis model described above, is
$5.9 million at December 31, 2004. The portion of the
estimated loss associated with the foreign exchange contracts
that offset the remeasurement gain and loss of the related
foreign currency denominated assets and liabilities is
$5.9 million at December 31, 2004 and would impact
earnings. The Company believes that such a hypothetical loss
from its derivatives would be offset by increases in the value
of the underlying transactions being hedged.
Interest Rate Fluctuations
Additionally, the Company is exposed to interest rate risk from
its Line of Credit (see Note 7 to the Company’s
Consolidated Financial Statements). Outstanding borrowings
accrue interest at the Company’s election, based upon the
Company’s consolidated leverage ratio and trailing four
quarters EBITDA, of (i) the higher of (a) the Federal
Funds Rate plus 50.0 basis points or (b) Bank of
America’s prime rate, and in either case plus a margin of
00.0 to 75.0 basis points or (ii) the Eurodollar Rate
(as defined in the agreement governing the Line of Credit) plus
a margin of 75.0 to 200.0 basis.
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| Item 8. |
Financial Statements and Supplementary Data |
The Company’s consolidated financial statements as of
December 31, 2004 and 2003 and for each of the three years
in the period ended December 31, 2004, together with the
reports of our independent registered public accounting firm,
are included in this Annual Report on Form 10-K on pages
F-1 through F-39.
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| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
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| Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls
and procedures are effective in timely alerting them to material
information required to be included in the Company’s
periodic filings with the Securities and Exchange Commission.
Management’s Report on Internal Control Over Financial
Reporting. Management of the Company is responsible for
establishing and maintaining effective internal control over
financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). Management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2004. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
its report entitled Internal Control — Integrated
Framework. Based on the assessment, management believes
that, as of December 31, 2004, the Company’s internal
control over financial reporting is effective based on those
criteria. During the fourth quarter of 2004, there were no
changes in the Company’s internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become
43
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2004 has been audited by Deloitte and Touche
LLP, an independent registered public accounting firm, as stated
in its report which is included herein.
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| Item 9B. |
Other Information |
None.
44
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Callaway Golf Company
Carlsbad, California
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal control
over Financial Reporting, appearing in Item 9A, that
Callaway Golf Company (“the Company”) maintained
effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal controls over financial reporting includes these
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of the changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
45
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedules as of and for the year ended December 31, 2004 of
the Company and our report, dated March 9, 2005, expressed
an unqualified opinion on those financial statements and
financial statement schedules.
Deloitte & Touche LLP
Costa Mesa, California
March 9, 2005
46
PART III
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| Item 10. |
Directors and Executive Officers of the Registrant |
Certain information concerning the Company’s executive
officers is included under the caption “Executive Officers
of the Registrant” following Part I, Item 4 of
this Form 10-K. The other information required by
Item 10 has been included in the Company’s definitive
Proxy Statement under the captions “Board of Directors and
Corporate Governance” and “Section 16(a)
Beneficial Ownership Reporting Compliance,” to be filed
with the Commission within 120 days after the end of fiscal
year 2004 pursuant to Regulation 14A, which information is
incorporated herein by this reference.
|
|
| Item 11. |
Executive Compensation |
The Company maintains employee benefit plans and programs in
which its executive officers are participants. Copies of certain
of these plans and programs are set forth or incorporated by
reference as Exhibits to this report. Information required by
Item 11 is included in the Company’s definitive Proxy
Statement under the captions “Compensation of Executive
Officers,” “Report of the Compensation and Management
Succession Committee on Executive Compensation,”
“Performance Graph” and “Board of Directors and
Corporate Governance,” to be filed with the Commission
within 120 days after the end of fiscal year 2004 pursuant
to Regulation 14A, which information is incorporated herein
by this reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters |
The information required by Item 12 is included in
Item 5 of this report and the Company’s definitive
Proxy Statement under the caption “Beneficial Ownership of
the Company’s Securities,” to be filed with the
Commission within 120 days after the end of fiscal year
2004 pursuant to Regulation 14A, which information is
incorporated herein by this reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The information required by Item 13 is included in the
Company’s definitive Proxy Statement under the caption
“Compensation of Executive Officers —
Compensation Committee Interlocks and Insider
Participation,” to be filed with the Commission within
120 days after the end of fiscal year 2004 pursuant to
Regulation 14A, which information is incorporated herein by
this reference.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information included in Item 14 is included in the
Company’s definitive Proxy Statement under the caption
“Information Concerning Independent Registered Public
Accounting Firm” to be filed with the Commission within
120 days after the end of fiscal year 2004 pursuant to
Regulation 14A, which information is incorporated herein by
this reference.
47
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) Documents filed as part of this report:
1. Financial
Statements. The following consolidated financial statements
of Callaway Golf Company and its subsidiaries required to be
filed pursuant to Part II, Item 8 of this
Form 10-K, are included in this Annual Report on
Form 10-K on pages F-1 through F-39:
|
|
| |
Consolidated Balance Sheets as of December 31, 2004 and
2003; |
| |
| |
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002; |
| |
| |
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002; |
| |
| |
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income for the years ended December 31, 2004,
2003 and 2002; |
| |
| |
Notes to Consolidated Financial Statements; and |
| |
| |
Report of Independent Registered Public Accounting Firm. |
2. Financial
Statement Schedule. The following consolidated financial
statement schedule of Callaway Golf Company and its subsidiaries
required to be filed pursuant to Part IV, Item 15 of
this Form 10-K, is included in this Annual Report on
Form 10-K on page S-1:
|
|
| |
Schedule II — Consolidated Valuation and
Qualifying Accounts; and |
| |
| |
All other schedules are omitted because they are not applicable
or the required information is shown in the Consolidated
Financial Statements or notes thereto. |
3. Exhibits.
A copy of any of the following exhibits will be furnished to any
beneficial owner of the Company’s Common Stock, or any
person from whom the Company solicits a proxy, upon written
request and payment of the Company’s reasonable expenses in
furnishing any such exhibit. All such requests should be
directed to the Company’s Investor Relations Department at
Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008.
| |
|
|
|
|
| |
3.1 |
|
|
Certificate of Incorporation, incorporated herein by this
reference to Exhibit 3.1 to the Company’s Current
Report on Form 8-K, as filed with the Securities and
Exchange Commission (“Commission”) on July 1,
1999 (file no. 1-10962). |
| |
3.2 |
|
|
Third Amended and Restated Bylaws, as amended and restated as of
December 3, 2003, incorporated herein by this reference to
Exhibit 3.2 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2003, as filed with
the Commission on March 15, 2004 (file no. 1-10962). |
| |
4.1 |
|
|
Dividend Reinvestment and Stock Purchase Plan, incorporated
herein by this reference to the Prospectus in the Company’s
Registration Statement on Form S-3, as filed with the
Commission on March 29, 1994 (file no. 33-77024). |
| |
4.2 |
|
|
First Amendment to Rights Agreement, effective June 22,
2001, between the Company and Mellon Investor Services LLC, as
Rights Agent, incorporated herein by this reference to
Exhibit 4.3 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2001, as filed with
the Commission on March 21, 2002 (file no. 1-10962). |
| |
4.3 |
|
|
Rights Agreement, dated as of June 21, 1995, between the
Company and Mellon Investor Services LLC (f/k/a Chemical Mellon
Shareholder Services), as Rights Agent, incorporated herein by
this reference to Exhibit 4.0 to the Company’s
Quarterly Report on Form 10-Q for the period ended June 30,
1995, as filed with the Commission on August 12, 1995 (file
no. 1-10962). |
48
| |
|
|
|
|
|
Executive Compensation Contracts/Plans |
| |
10.1 |
|
|
Compensation Agreement between the Company and William C. Baker,
incorporated herein by this reference to Exhibit 10.49 to
the Company’s Current Report on Form 8-K, as filed with the
Commission on January 24, 2005 (file no. 1-10962). |
| |
10.2 |
|
|
Notice of Grant of Stock Option and Option Agreement between the
Company and William C. Baker, incorporated herein by this
reference to Exhibit 10.50 to the Company’s Current
Report on Form 8-K, as filed with the Commission on
January 24, 2005 (file no. 1-10962). |
| |
10.3 |
|
|
First Amendment to Executive Officer Employment Agreement, dated
April 1, 2003, between the Company and Richard C.
Helmstetter, incorporated herein by this reference to
Exhibit 10.49 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, as filed
with the Commission on May 7, 2003 (file no. 1-10962). |
| |
10.4 |
|
|
Executive Officer Employment Agreement, entered into as of
January 1, 1998, between the Company and Richard C.
Helmstetter, incorporated herein by this reference to
Exhibit 10.5 to the Company’s Annual Report on Form
10-K for the year ended December 31, 1997, as filed with
the Commission on March 31, 1998 (file no. 1-10962). |
| |
10.5 |
|
|
Second Amendment to First Amended Executive Officer Employment
Agreement, effective September 15, 2003, between the
Company and Steven C. McCracken, incorporated herein by this
reference to Exhibit 10.61 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2003, as filed with the Commission on November 14, 2003
(file no. 1-10962). |
| |
10.6 |
|
|
First Amendment to First Amended Executive Officer Employment
Agreement, dated March 1, 2003, between the Company and
Steven C. McCracken, incorporated herein by this reference to
Exhibit 10.50 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, as filed
with the Commission on May 7, 2003 (file no. 1-10962). |
| |
10.7 |
|
|
First Amended Executive Officer Employment Agreement, effective
as of June 1, 2002, between the Company and Steven C.
McCracken, incorporated herein by this reference to
Exhibit 10.54 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, as filed
with the Commission on August 14, 2002 (file no. 1-10962). |
| |
10.8 |
|
|
Second Amendment to First Amended Executive Officer Employment
Agreement, effective September 15, 2003, between the
Company and Bradley J. Holiday, incorporated herein by this
reference to Exhibit 10.62 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2003, as filed with the Commission on November 14, 2003
(file no. 1-10962). |
| |
10.9 |
|
|
First Amendment to First Amended Executive Officer Employment
Agreement, dated March 1, 2003, between the Company and
Bradley J. Holiday, incorporated herein by this reference to
Exhibit 10.51 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, as filed
with the Commission on May 7, 2003 (file no. 1-10962). |
| |
10.10 |
|
|
First Amended Executive Officer Employment Agreement, effective
as of June 1, 2002, between the Company and Bradley J.
Holiday, incorporated herein by this reference to
Exhibit 10.55 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, as filed
with the Commission on August 14, 2002 (file
no. 1-10962). |
| |
10.11 |
|
|
Officer Employment Agreement between the Company and Robert A.
Penicka, incorporated herein by this reference to
Exhibit 10.51 to the Company’s Current Report on Form
8-K, as filed with the Commission on January 24, 2005 (file
no. 1-10962). |
| |
10.12 |
|
|
Officer Employment Agreement between The Top-Flite Golf Company
(f/k/a TFGC Acquisition Corp.) and Robert A. Penicka,
incorporated herein by this reference to Exhibit 10.59 to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, as filed with the Commission on
November 14, 2003 (file no. 1-10962). |
| |
10.13 |
|
|
First Amendment to First Amended Officer Employment Agreement,
effective as of October 6, 2003, between the Company and
John F. Melican.† |
| |
10.14 |
|
|
First Amended Officer Employment Agreement, effective as of
March 1, 2003, between the Company and John F.
Melican.† |
| |
10.15 |
|
|
Separation Agreement, entered into on October 28, 2004,
between the Company and Ronald A. Drapeau, incorporated herein
by this reference to Exhibit 10.47 to the Company’s
Current Report on Form 8-K, as filed with the Commission on
October 29, 2004 (file no. 1-10962). |
49
| |
|
|
|
|
| |
10.16 |
|
|
Second Amendment to Second Amended Executive Officer Employment
Agreement, effective as of September 15, 2003, between the
Company and Ronald A. Drapeau, incorporated herein by this
reference to Exhibit 10.60 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2003, as filed with the Commission on November 14, 2003
(file no. 1-10962). |
| |
10.17 |
|
|
First Amendment to Second Amended Executive Officer Employment
Agreement, dated March 1, 2003, between the Company and
Ronald A. Drapeau, incorporated herein by this reference to
Exhibit 10.48 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003, as filed
with the Commission on May 7, 2003 (file no. 1-10962). |
| |
10.18 |
|
|
Second Amended Executive Officer Employment Agreement, effective
as of June 1, 2002, between the Company and Ronald A.
Drapeau, incorporated herein by this reference to
Exhibit 10.53 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, as filed
with the Commission on August 14, 2002 (file
no. 1-10962). |
| |
10.19 |
|
|
Separation Agreement, entered into on February 24, 2005,
between the Company and Patrice Hutin, incorporated herein by
this reference to Exhibit 10.52 to the Company’s
Current Report on Form 8-K, as filed with the Commission on
March 1, 2005 (file no. 1-10962). |
| |
10.20 |
|
|
Second Amendment to Executive Officer Employment Agreement,
effective September 15, 2003, between the Company and
Patrice Hutin, incorporated herein by this reference to
Exhibit 10.63 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003, as
filed with the Commission on November 14, 2003 (file
no. 1-10962). |
| |
10.21 |
|
|
First Amendment to Executive Officer Employment Agreement, dated
March 1, 2003, between the Company and Patrice Hutin,
incorporated herein by this reference to Exhibit 10.52 to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003, as filed with the Commission on
May 7, 2003 (file no. 1-10962). |
| |
10.22 |
|
|
Executive Officer Employment Agreement, effective
November 6, 2002, between the Company and Patrice Hutin,
incorporated herein by this reference to Exhibit 10.7 to
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002, as filed with the Commission on
March 17, 2003 (file no. 1-10962). |
| |
10.23 |
|
|
Callaway Golf Company Executive Deferred Compensation Plan, as
amended and restated, effective May 6, 2002.† |
| |
10.24 |
|
|
Trust Agreement for the Callaway Golf Company Executive Deferred
Compensation Plan, entered into as of May 6, 2002, between
the Company and U.S. Trust Company, N.A.† |
| |
10.25 |
|
|
Form of Notice of Grant of Stock Option and Option Agreement for
Non-Employee Directors.† |
| |
10.26 |
|
|
Callaway Golf Company 2001 Non-Employee Directors Stock Option
Plan, incorporated herein by this reference to Appendix A to the
Company’s definitive Proxy Statement on Schedule 14A filed
with the Commission on March 27, 2000 (file
no. 1-10962). |
| |
10.27 |
|
|
Callaway Golf Company Non-Employee Directors Stock Option Plan
(as amended and restated August 15, 2000), incorporated
herein by this reference to Exhibit 10.25 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Commission on
March 21, 2002 (file no. 1-10962). |
| |
10.28 |
|
|
Form of Notice of Grant of Stock Option and Option Agreement for
Officers.† |
| |
10.29 |
|
|
Callaway Golf Company 2004 Equity Incentive Plan, incorporated
herein by this reference to Exhibit B to the Company’s
definitive Proxy Statement on Schedule 14A filed with the
Commission on April 20, 2004 (file no. 1-10962). |
| |
10.30 |
|
|
Callaway Golf Company 1998 Stock Incentive Plan (as amended and
restated August 15, 2000), incorporated herein by this
reference to Exhibit 10.24 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2001,
as filed with the Commission on March 21, 2002 (file
no. 1-10962). |
| |
10.31 |
|
|
Amended and Restated 1996 Stock Option Plan (as amended and
restated May 3, 2000), incorporated herein by this
reference to Exhibit 10.23 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2000, as
filed with the Commission on August 14, 2000 (file
no. 1-10962). |
50
| |
|
|
|
|
| |
10.32 |
|
|
Callaway Golf Company 1995 Stock Incentive Plan (as amended and
restated November 7, 2001), incorporated herein by this
reference to Exhibit 10.22 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2002,
as filed with the Commission on March 17, 2003 (file
no. 1-10962). |
| |
10.33 |
|
|
Callaway Golf Company 1991 Stock Incentive Plan (as amended and
restated August 2000), incorporated herein by this reference to
Exhibit 10.24 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2001, as filed with
the Commission on March 21, 2002 (file no. 1-10962). |
| |
10.34 |
|
|
Indemnification Agreement, dated April 7, 2004, between the
Company and Anthony S. Thornley.† |
| |
10.35 |
|
|
Indemnification Agreement, dated as of April 21, 2003,
between the Company and Samuel H. Armacost, incorporated herein
by this reference to Exhibit 10.57 the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003, as filed with the Commission on
August 7, 2003 (file no. 1-10962). |
| |
10.36 |
|
|
Indemnification Agreement, dated as of April 21, 2003,
between the Company and John C. Cushman, III, incorporated
herein by this reference to Exhibit 10.58 the
Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, as filed with the Commission on
August 7, 2003 (file no. 1-10962). |
| |
10.37 |
|
|
Indemnification Agreement, effective June 7, 2001, between
the Company and Ronald S. Beard, incorporated herein by this
reference to Exhibit 10.28 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2001, as filed with the Commission on November 14, 2001
(file no. 1-10962). |
| |
10.38 |
|
|
Indemnification Agreement, dated as of July 1, 1999,
between the Company and William C. Baker, incorporated herein by
this reference to Exhibit 10.27 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999, as filed with the Commission on
August 16, 1999 (file no. 1-10962). |
| |
10.39 |
|
|
Indemnification Agreement, dated July 1, 1999, between the
Company and Yotaro Kobayashi, incorporated herein by this
reference to Exhibit 10.30 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, as
filed with the Commission on August 16, 1999 (file
no. 1-10962). |
| |
10.40 |
|
|
Indemnification Agreement, dated July 1, 1999, between the
Company and Richard L. Rosenfield, incorporated herein by this
reference to Exhibit 10.32 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, as
filed with the Commission on August 16, 1999 (file
no. 1-10962). |
|
Other Contracts |
| |
10.41 |
|
|
Amendment No. 4 to Asset Purchase Agreement, dated as of
September 30, 2003, between the Company and TFGC Estate
Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by
this reference to Exhibit 99.5 to the Company’s
Current Report on Form 8-K, as filed with the Commission on
September 30, 2003 (file no. 1-10962). |
| |
10.42 |
|
|
Amendment No. 3 to Asset Purchase Agreement, dated as of
September 15, 2003, between the Company and TFGC Estate
Inc. (f/k/a The Top-Flite Golf Company), incorporated herein by
this reference to Exhibit 99.4 to the Company’s
Current Report on Form 8-K, as filed with the Commission on
September 30, 2003 (file no. 1-10962). |
| |
10.43 |
|
|
Amendment No. 2 to Asset Purchase Agreement, dated as of
September 4, 2003, between the Company and TFGC Estate Inc.
(f/k/a The Top-Flite Golf Company), incorporated herein by this
reference to Exhibit 99.3 to the Company’s Current
Report on Form 8-K, as filed with the Commission on
September 30, 2003 (file no. 1-10962). |
| |
10.44 |
|
|
Amendment No. 1 to Asset Purchase Agreement, dated as of
August 11, 2003, between the Company and TFGC Estate Inc.
(f/k/a The Top-Flite Golf Company), incorporated herein by this
reference to Exhibit 99.2 to the Company’s Current
Report on Form 8-K, as filed with the Commission on
September 30, 2003 (file no. 1-10962). |
51
| |
|
|
|
|
| |
10.45 |
|
|
Asset Purchase Agreement, dated as of June 30, 2003,
between the Company and The Top-Flite Golf Company (f/k/a
Spalding Sports Worldwide, Inc.), incorporated herein by this
reference to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, as filed with the
Commission on August 7, 2003 (file no. 1-10962). |
| |
10.46 |
|
|
Amended and Restated Credit Agreement, dated as of
November 5, 2004, between the Company and Bank of America,
N.A. as Administrative Agent, Swing Line Lender and L/C Issuer,
Banc of America Securities LLC, as Sole Lead Manager and Sole
Book Manager, and the other lenders party to the Amended and
Restated Credit Agreement, incorporated herein by this reference
to Exhibit 10.48 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004, as
filed with the Commission on November 9, 2004 (file no.
1-10962). |
| |
10.47 |
|
|
Credit Agreement, dated as of November 10, 2003, between
the Company and Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Banc of America Securities
LLC, as Sole Lead Manager and Sole Book Manager, and the other
lenders party to the Credit Agreement, incorporated herein by
this reference to Exhibit 10.37 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2003, as filed with the Commission on March 15, 2004 (file
no. 1-10962). |
| |
10.48 |
|
|
Pledge Agreement, dated November 10, 2003, by and between
the Company and Bank of America, N.A., as Administrative Agent,
incorporated herein by this reference to Exhibit 10.38 to
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003, as filed with the Commission on
March 15, 2004 (file no. 1-10962). |
| |
10.49 |
|
|
Master Energy Purchase and Sale Agreement and related
Confirmation letter, each entered into as of April 12,
2001, between the Company and Enron Energy Services, Inc.,
incorporated herein by this reference to Exhibit 10.34 to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, as filed with the Commission on
August 14, 2001 (file no. 1-10962). |
| |
10.50 |
|
|
Amendment No. 2 to Trust Agreement, effective as of
October 21, 2004, by the Company with the consent of
Arrowhead Trust Incorporated.† |
| |
10.51 |
|
|
Amendment No. 1 to Trust Agreement, effective as of
June 29, 2001, by the Company with the consent of Arrowhead
Trust Incorporated, incorporated herein by this reference to
Exhibit 10.46 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2001, as filed with
the Commission on March 21, 2002 (file no. 1-10962). |
| |
10.52 |
|
|
Assignment and Assumption Agreement, effective as of
April 24, 2000, among the Company, Sanwa Bank California
and Arrowhead Trust Incorporated, incorporated herein by
reference to Exhibit 10.47 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2000,
as filed with the Commission on March 30, 2001 (file no.
1-10962). |
| |
10.53 |
|
|
Trust Agreement, dated July 14, 1995, between the Company
and Sanwa Bank California, as Trustee, for the benefit of
participating employees, incorporated herein by this reference
to Exhibit 10.45 to the corresponding exhibit to the
Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, as filed with the Commission on
November 14, 1995 (file no. 1-10962). |
| |
21.1 |
|
|
List of Subsidiaries.† |
| |
23.1 |
|
|
Consent of Deloitte & Touche LLP.† |
| |
24.1 |
|
|
Form of Power of Attorney.† |
| |
31.1 |
|
|
Certification of William C. Baker pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.† |
| |
31.2 |
|
|
Certification of Bradley J. Holiday pursuant to Rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.† |
| |
32.1 |
|
|
Certification of William C. Baker and Bradley J. Holiday
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.† |
|
|
| † |
Included in this Report |
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
|
| |
William C. Baker |
| |
Chairman and Chief Executive Officer |
Date: March 9, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and as of the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Dated as of |
| |
|
|
|
|
| |
|
Principal Executive Officer: |
|
|
|
|
| |
/s/ William C. Baker
William
C. Baker |
|
Chairman of the Board and
Chief Executive Officer |
|
March 9, 2005 |
| |
Principal Financial Officer and
Principal Accounting Officer: |
|
|
|
|
| |
/s/ Bradley J. Holiday
Bradley
J. Holiday |
|
Senior Executive Vice President and
Chief Financial Officer |
|
March 9, 2005 |
| |
|
Directors: |
|
|
|
|
| |
*
Samuel
H. Armacost |
|
Director |
|
March 9, 2005 |
| |
*
Ronald
S. Beard |
|
Director |
|
March 9, 2005 |
| |
*
John
C. Cushman, III |
|
Director |
|
March 9, 2005 |
| |
*
Yotaro
Kobayashi |
|
Director |
|
March 9, 2005 |
| |
*
Richard
L. Rosenfield |
|
Director |
|
March 9, 2005 |
| |
*
Anthony
S. Thornley |
|
Director |
|
March 9, 2005 |
| |
|
*By: |
|
/s/ Bradley J. Holiday
Bradley
J. Holiday
Attorney-in-fact |
|
|
|
|
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Callaway Golf Company
Carlsbad, California
We have audited the accompanying consolidated balance sheets of
Callaway Golf Company and subsidiaries (the “Company”)
as of December 31, 2004 and 2003, and the related
consolidated statements of operations, shareholders’ equity
and comprehensive income and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedules listed in the
Index at Item (15)a2. These financial statements and
financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Callaway Golf Company and subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report, dated
March 9, 2005, expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Deloitte & Touche
LLP
Costa Mesa, California
March 9, 2005
F-2
CALLAWAY GOLF COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
31,657 |
|
|
$ |
47,340 |
|
| |
Accounts receivable, net
|
|
|
105,153 |
|
|
|
100,664 |
|
| |
Inventories, net
|
|
|
181,230 |
|
|
|
185,389 |
|
| |
Deferred taxes
|
|
|
32,959 |
|
|
|
36,707 |
|
| |
Income taxes receivable
|
|
|
28,697 |
|
|
|
— |
|
| |
Other current assets
|
|
|
14,036 |
|
|
|
13,362 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
393,732 |
|
|
|
383,462 |
|
|
Property, plant and equipment, net
|
|
|
135,865 |
|
|
|
164,763 |
|
|
Intangible assets, net
|
|
|
149,168 |
|
|
|
149,635 |
|
|
Goodwill
|
|
|
30,468 |
|
|
|
20,216 |
|
|
Deferred taxes
|
|
|
9,837 |
|
|
|
12,289 |
|
|
Other assets
|
|
|
16,667 |
|
|
|
18,201 |
|
| |
|
|
|
|
|
|
| |
|
$ |
735,737 |
|
|
$ |
748,566 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued expenses
|
|
$ |
75,501 |
|
|
$ |
79,787 |
|
| |
Accrued employee compensation and benefits
|
|
|
20,215 |
|
|
|
25,544 |
|
| |
Accrued warranty expense
|
|
|
12,043 |
|
|
|
12,627 |
|
| |
Bank line of credit
|
|
|
13,000 |
|
|
|
— |
|
| |
Capital leases, current portion
|
|
|
39 |
|
|
|
240 |
|
| |
Income taxes payable
|
|
|
— |
|
|
|
11,962 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
120,798 |
|
|
|
130,160 |
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
Deferred compensation
|
|
|
8,674 |
|
|
|
8,947 |
|
| |
Energy derivative valuation account
|
|
|
19,922 |
|
|
|
19,922 |
|
| |
Capital leases, net of current portion
|
|
|
26 |
|
|
|
154 |
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred Stock, $.01 par value, 3,000,000 shares
authorized, none issued and outstanding at December 31,
2004 and 2003
|
|
|
— |
|
|
|
— |
|
| |
Common Stock, $.01 par value, 240,000,000 shares
authorized, 84,785,694 shares and 83,710,094 shares
issued at December 31, 2004 and 2003, respectively
|
|
|
848 |
|
|
|
837 |
|
| |
Additional paid-in capital
|
|
|
387,950 |
|
|
|
400,939 |
|
| |
Unearned compensation
|
|
|
(12,562 |
) |
|
|
— |
|
| |
Retained earnings
|
|
|
437,269 |
|
|
|
466,441 |
|
| |
Accumulated other comprehensive income
|
|
|
11,081 |
|
|
|
2,890 |
|
| |
Less: Grantor Stock Trust held at market value,
7,176,678 shares and 8,702,577 shares at
December 31, 2004 and 2003, respectively
|
|
|
(96,885 |
) |
|
|
(146,638 |
) |
| |
|
|
|
|
|
|
| |
|
|
727,701 |
|
|
|
724,469 |
|
| |
Less: Common Stock held in treasury, at cost,
8,497,667 shares and 8,144,667 shares at
December 31, 2004 and 2003, respectively
|
|
|
(141,384 |
) |
|
|
(135,086 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total shareholders’ equity
|
|
|
586,317 |
|
|
|
589,383 |
|
| |
|
|
|
|
|
|
| |
|
$ |
735,737 |
|
|
$ |
748,566 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-3
CALLAWAY GOLF COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
934,564 |
|
|
|
100 |
% |
|
$ |
814,032 |
|
|
|
100% |
|
|
$ |
793,219 |
|
|
|
100% |
|
|
Cost of sales
|
|
|
575,742 |
|
|
|
62 |
% |
|
|
445,417 |
|
|
|
55% |
|
|
|
393,068 |
|
|
|
50% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
358,822 |
|
|
|
38 |
% |
|
|
368,615 |
|
|
|
45% |
|
|
|
400,151 |
|
|
|
50% |
|
|
Selling expenses
|
|
|
263,089 |
|
|
|
28 |
% |
|
|
207,783 |
|
|
|
26% |
|
|
|
200,329 |
|
|
|
25% |
|
|
General and administrative expenses
|
|
|
89,878 |
|
|
|
10 |
% |
|
|
65,448 |
|
|
|
8% |
|
|
|
56,580 |
|
|
|
7% |
|
|
Research and development expenses
|
|
|
30,557 |
|
|
|
3 |
% |
|
|
29,529 |
|
|
|
4% |
|
|
|
32,182 |
|
|
|
4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
|
383,524 |
|
|
|
41 |
% |
|
|
302,760 |
|
|
|
37% |
|
|
|
289,091 |
|
|
|
36% |
|
|
Income (loss) from operations
|
|
|
(24,702 |
) |
|
|
(3 |
)% |
|
|
65,855 |
|
|
|
8% |
|
|
|
111,060 |
|
|
|
14% |
|
|
Interest and other income, net
|
|
|
1,934 |
|
|
|
|
|
|
|
3,550 |
|
|
|
|
|
|
|
2,271 |
|
|
|
|
|
|
Interest expense
|
|
|
(945 |
) |
|
|
|
|
|
|
(1,522 |
) |
|
|
|
|
|
|
(1,660 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(23,713 |
) |
|
|
(3 |
)% |
|
|
67,883 |
|
|
|
8% |
|
|
|
111,671 |
|
|
|
14% |
|
|
Provision for income taxes
|
|
|
(13,610 |
) |
|
|
|
|
|
|
22,360 |
|
|
|
|
|
|
|
42,225 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(10,103 |
) |
|
|
(1 |
)% |
|
$ |
45,523 |
|
|
|
6% |
|
|
$ |
69,446 |
|
|
|
9% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.15 |
) |
|
|
|
|
|
$ |
0.69 |
|
|
|
|
|
|
$ |
1.04 |
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.15 |
) |
|
|
|
|
|
$ |
0.68 |
|
|
|
|
|
|
$ |
1.03 |
|
|
|
|
|
|
Common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
67,721 |
|
|
|
|
|
|
|
66,027 |
|
|
|
|
|
|
|
66,517 |
|
|
|
|
|
| |
Diluted
|
|
|
67,721 |
|
|
|
|
|
|
|
66,471 |
|
|
|
|
|
|
|
67,274 |
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
CALLAWAY GOLF COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(10,103 |
) |
|
$ |
45,523 |
|
|
$ |
69,446 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
51,154 |
|
|
|
44,496 |
|
|
|
37,640 |
|
| |
|
Loss on disposal of long-lived assets
|
|
|
7,669 |
|
|
|
24,163 |
|
|
|
1,168 |
|
| |
|
Loss on purchase of leased equipment
|
|
|
— |
|
|
|
— |
|
|
|
2,318 |
|
| |
|
Tax benefit (reversal of benefit) from exercise of stock options
|
|
|
2,161 |
|
|
|
(982 |
) |
|
|
5,479 |
|
| |
|
Non-cash compensation
|
|
|
1,741 |
|
|
|
15 |
|
|
|
314 |
|
| |
|
Net non-cash foreign currency hedging (gains) loss
|
|
|
1,811 |
|
|
|
2,619 |
|
|
|
(4,238 |
) |
| |
|
Net (gain) loss from sale of marketable securities
|
|
|
— |
|
|
|
98 |
|
|
|
(37 |
) |
| |
|
Deferred taxes
|
|
|
7,707 |
|
|
|
(8,320 |
) |
|
|
11,357 |
|
| |
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable, net
|
|
|
(1,048 |
) |
|
|
12,698 |
|
|
|
(9,279 |
) |
| |
|
Inventories, net
|
|
|
10,299 |
|
|
|
4,897 |
|
|
|
21,785 |
|
| |
|
Other assets
|
|
|
1,554 |
|
|
|
(4,743 |
) |
|
|
10,202 |
|
| |
|
Accounts payable and accrued expenses
|
|
|
(16,945 |
) |
|
|
(2,561 |
) |
|
|
11,579 |
|
| |
|
Accrued employee compensation and benefits
|
|
|
(5,895 |
) |
|
|
(3,898 |
) |
|
|
(2,383 |
) |
| |
|
Accrued warranty expense
|
|
|
(584 |
) |
|
|
(838 |
) |
|
|
(21,400 |
) |
| |
|
Income taxes receivable and payable
|
|
|
(40,711 |
) |
|
|
4,004 |
|
|
|
6,185 |
|
| |
|
Deferred compensation
|
|
|
(273 |
) |
|
|
1,572 |
|
|
|
(922 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by operating activities
|
|
|
8,537 |
|
|
|
118,743 |
|
|
|
139,214 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capital expenditures
|
|
|
(25,986 |
) |
|
|
(7,810 |
) |
|
|
(73,502 |
) |
| |
Acquisitions, net of cash acquired
|
|
|
(9,204 |
) |
|
|
(160,321 |
) |
|
|
— |
|
| |
Proceeds from sale of marketable securities
|
|
|
— |
|
|
|
24 |
|
|
|
6,998 |
|
| |
Cash paid for investment
|
|
|
— |
|
|
|
— |
|
|
|
(2,000 |
) |
| |
Proceeds from sale of capital assets
|
|
|
431 |
|
|
|
178 |
|
|
|
871 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash used in investing activities
|
|
|
(34,759 |
) |
|
|
(167,929 |
) |
|
|
(67,633 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuance of Common Stock
|
|
|
20,311 |
|
|
|
17,994 |
|
|
|
18,305 |
|
| |
Acquisition of Treasury Stock
|
|
|
(6,298 |
) |
|
|
(4,755 |
) |
|
|
(46,457 |
) |
| |
Proceeds from Line of Credit
|
|
|
13,000 |
|
|
|
— |
|
|
|
— |
|
| |
Dividends paid, net
|
|
|
(19,069 |
) |
|
|
(18,536 |
) |
|
|
(18,601 |
) |
| |
Payments on financing arrangements
|
|
|
— |
|
|
|
(8,117 |
) |
|
|
(2,374 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by (used in) financing activities
|
|
|
7,944 |
|
|
|
(13,414 |
) |
|
|
(49,127 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
2,595 |
|
|
|
1,488 |
|
|
|
1,735 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(15,683 |
) |
|
|
(61,112 |
) |
|
|
24,189 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
47,340 |
|
|
|
108,452 |
|
|
|
84,263 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
31,657 |
|
|
$ |
47,340 |
|
|
$ |
108,452 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures (See Note 3 for
acquisition-related disclosures):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable securities received upon demutualization of insurance
provider
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
540 |
|
| |
Unrealized loss on marketable securities
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(92 |
) |
| |
Cash paid for interest and fees
|
|
$ |
(1,384 |
) |
|
$ |
(835 |
) |
|
$ |
(953 |
) |
| |
Cash paid for income taxes
|
|
$ |
(17,379 |
) |
|
$ |
(30,925 |
) |
|
$ |
(16,628 |
) |
The accompanying notes are an integral part of these financial
statements.
F-5
CALLAWAY GOLF COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Other | |
|
Grantor | |
|
Treasury Stock | |
|
|
|
|
| |
|
| |
|
Paid-in | |
|
Unearned | |
|
Retained | |
|
Comprehensive | |
|
Stock | |
|
| |
|
|
|
Comprehensive | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Earnings | |
|
Income (Loss) | |
|
Trust | |
|
Shares | |
|
Amount | |
|
Total | |
|
Income | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2001
|
|
|
82,694 |
|
|
$ |
827 |
|
|
$ |
419,541 |
|
|
$ |
(211 |
) |
|
$ |
388,609 |
|
|
$ |
(4,399 |
) |
|
$ |
(206,144 |
) |
|
|
(4,939 |
) |
|
$ |
(83,874 |
) |
|
$ |
514,349 |
|
|
$ |
60,072 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
879 |
|
|
|
9 |
|
|
|
10,067 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,950 |
|
|
|
— |
|
|
|
— |
|
|
|
13,026 |
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
5,479 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,479 |
|
|
|
|
|
|
Acquisition of Treasury Stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,833 |
) |
|
|
(46,457 |
) |
|
|
(46,457 |
) |
|
|
|
|
|
Compensatory stock and stock options
|
|
|
— |
|
|
|
— |
|
|
|
118 |
|
|
|
196 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
314 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
4 |
|
|
|
— |
|
|
|
(2,590 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,869 |
|
|
|
— |
|
|
|
— |
|
|
|
5,279 |
|
|
|
|
|
|
Cash dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,502 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,502 |
) |
|
|
|
|
|
Dividends on shares held by Grantor Stock Trust
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,901 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,901 |
|
|
|
|
|
|
Adjustment of Grantor Stock Trust shares to market value
|
|
|
— |
|
|
|
— |
|
|
|
(61,119 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61,119 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Equity adjustment from foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,602 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,602 |
|
|
$ |
5,602 |
|
|
Unrealized loss on cash flow hedges, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,958 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,958 |
) |
|
|
(4,958 |
) |
|
Unrealized loss on marketable securities, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(92 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(92 |
) |
|
|
(92 |
) |
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
69,446 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
69,446 |
|
|
|
69,446 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
83,577 |
|
|
$ |
836 |
|
|
$ |
371,496 |
|
|
$ |
(15 |
) |
|
$ |
439,454 |
|
|
$ |
(3,847 |
) |
|
$ |
(134,206 |
) |
|
|
(7,772 |
) |
|
$ |
(130,331 |
) |
|
$ |
543,387 |
|
|
$ |
69,998 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
133 |
|
|
|
1 |
|
|
|
(900 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,650 |
|
|
|
— |
|
|
|
— |
|
|
|
13,751 |
|
|
|
|
|
|
Reversal of tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
(982 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(982 |
) |
|
|
|
|
|
Acquisition of Treasury Stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(373 |
) |
|
|
(4,755 |
) |
|
|
(4,755 |
) |
|
|
|
|
|
Compensatory stock and stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
— |
|
|
|
— |
|
|
|
(851 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,094 |
|
|
|
— |
|
|
|
— |
|
|
|
4,243 |
|
|
|
|
|
|
Cash dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,160 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,160 |
) |
|
|
|
|
|
Dividends on shares held by Grantor Stock Trust
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,624 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,624 |
|
|
|
|
|
|
Adjustment of Grantor Stock Trust shares to market value
|
|
|
— |
|
|
|
— |
|
|
|
32,176 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(32,176 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Equity adjustment from foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,396 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,396 |
|
|
$ |
7,396 |
|
|
Unrealized loss on cash flow hedges, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(751 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(751 |
) |
|
|
(751 |
) |
|
Unrealized loss on marketable securities, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
92 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45,523 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45,523 |
|
|
|
45,523 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
83,710 |
|
|
$ |
837 |
|
|
$ |
400,939 |
|
|
$ |
— |
|
|
$ |
466,441 |
|
|
$ |
2,890 |
|
|
$ |
(146,638 |
) |
|
|
(8,145 |
) |
|
$ |
(135,086 |
) |
|
$ |
589,383 |
|
|
$ |
52,260 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
23 |
|
|
|
— |
|
|
|
(3,532 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,186 |
|
|
|
— |
|
|
|
— |
|
|
|
15,654 |
|
|
|
|
|
|
Tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
2,161 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,161 |
|
|
|
|
|
|
Issuance of Restricted Common Stock
|
|
|
1,053 |
|
|
|
11 |
|
|
|
14,290 |
|
|
|
(14,301 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Acquisition of Treasury Stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(353 |
) |
|
|
(6,298 |
) |
|
|
(6,298 |
) |
|
|
|
|
|
Compensatory stock and stock options
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
1,739 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,741 |
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
— |
|
|
|
— |
|
|
|
(1,302 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,959 |
|
|
|
— |
|
|
|
— |
|
|
|
4,657 |
|
|
|
|
|
|
Cash dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,176 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,176 |
) |
|
|
|
|
|
Dividends on shares held by Grantor Stock Trust
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,107 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,107 |
|
|
|
|
|
|
Adjustment of Grantor Stock Trust shares to market value
|
|
|
— |
|
|
|
— |
|
|
|
(24,608 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,608 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Equity adjustment from foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,252 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,252 |
|
|
$ |
4,252 |
|
|
Unrealized loss on cash flow hedges, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,939 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,939 |
|
|
|
3,939 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,103 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,103 |
) |
|
|
(10,103 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
84,786 |
|
|
$ |
848 |
|
|
$ |
387,950 |
|
|
$ |
(12,562 |
) |
|
$ |
437,269 |
|
|
$ |
11,081 |
|
|
$ |
(96,885 |
) |
|
|
(8,498 |
) |
|
$ |
(141,384 |
) |
|
$ |
586,317 |
|
|
$ |
(1,912 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Callaway Golf Company (“Callaway Golf” or the
“Company”), a Delaware corporation, together with its
subsidiaries, designs, manufactures and sells high quality golf
clubs (drivers, fairway woods, irons, wedges and putters) and
golf balls. The Company also sells golf accessories such as golf
bags, golf gloves, golf headwear, travel covers and bags, golf
towels and golf umbrellas. The Company generally sells its
products to golf retailers, sporting goods retailers and mass
merchants, directly and through its wholly-owned subsidiaries,
and to third party distributors in the United States and in over
100 countries around the world. The Company also sells
pre-owned Callaway Golf products through its website,
www.callawaygolfpreowned.com. In addition, the Company
licenses its name for apparel, golf shoes, watches, luggage and
other golf accessories.
|
|
| Note 2. |
Significant Accounting Policies |
|
|
|
Principles of Consolidation |
The accompanying consolidated financial statements include the
accounts of Callaway Golf Company and its domestic and foreign
subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(GAAP) requires management to make estimates and judgments
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. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Examples of such estimates include provisions for
warranty, uncollectable accounts receivable, inventory
obsolescence, market value estimates of derivative instruments
and recoverability of long-lived assets. Actual results may
materially differ from these estimates. On an on-going basis,
the Company reviews its estimates to ensure that these estimates
appropriately reflect changes in its business or as new
information becomes available.
Sales are recognized when both title and risk of loss transfer
to the customer. Sales are recorded net of an allowance for
sales returns and sales programs. Sales returns are estimated
based upon historical returns, current economic trends, changes
in customer demands and sell-through of products. The Company
also records estimated reductions to revenue for sales programs
such as incentive offerings. Sales program accruals are
estimated based upon the attributes of the sales program,
management’s forecast of future product demand, and
historical customer participation in similar programs.
Amounts billed to customers for shipping and handling are
included in net sales and costs incurred related to shipping and
handling are included in cost of sales.
Royalty income is recorded as underlying product sales occur,
subject to certain minimums, in accordance with the related
licensing arrangements (Note 15). Royalty income for 2004,
2003 and 2002 was $4,132,000, $2,703,000 and $1,155,000,
respectively.
The Company has a stated two-year warranty policy for its golf
clubs, although the Company’s historical practice has been
to honor warranty claims well after the two-year stated warranty
period. The Company’s policy is to accrue the estimated
cost of warranty coverage at the time the sale is recorded. In
estimating its
F-7
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
future warranty obligations the Company considers various
relevant factors, including the Company’s stated warranty
policies and practices, the historical frequency of claims, and
the cost to replace or repair its products under warranty. The
following table provides a reconciliation of the activity
related to the Company’s reserve for warranty expense:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Beginning balance
|
|
$ |
12,627 |
|
|
$ |
13,464 |
|
|
$ |
34,864 |
|
|
Provision(1)
|
|
|
10,930 |
|
|
|
11,752 |
|
|
|
(6,987 |
) |
|
Claims paid/costs incurred
|
|
|
(11,514 |
) |
|
|
(12,589 |
) |
|
|
(14,413 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
12,043 |
|
|
$ |
12,627 |
|
|
$ |
13,464 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
In the third quarter of 2002, the Company changed its
methodology of estimating warranty accruals and reduced its
warranty reserve by approximately $17,000,000. The change in
methodology has been accounted for as a change in accounting
principle inseparable from a change in estimate (Note 4). |
|
|
|
Fair Value of Financial Instruments |
The Company’s financial instruments consist of cash and
cash equivalents, trade receivables and payables, forward
foreign currency exchange contracts (Note 8) and its
financing arrangements (Note 7). The carrying amounts of
these instruments approximate fair value because of their
short-term maturities and variable interest rates.
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 2004, 2003 and 2002 were $56,585,000, $44,770,000
and $44,001,000, respectively.
|
|
|
Research and Development Costs |
Research and development costs are expensed as incurred.
Research and development costs for 2004, 2003 and 2002 were
$30,557,000, $29,529,000 and $32,182,000, respectively.
|
|
|
Foreign Currency Translation and Transactions |
The Company’s foreign subsidiaries utilize their local
currency as their functional currency. The accounts of these
foreign subsidiaries have been translated into United States
dollars using the current exchange rate at the balance sheet
date for assets and liabilities and at the average exchange rate
for the period for revenues and expenses. Cumulative translation
gains or losses are recorded as accumulated other comprehensive
income in shareholders’ equity. Gains or losses resulting
from transactions that are made in a currency different from the
functional currency are recognized in earnings as they occur or,
for hedging contracts, when the underlying hedged transaction
affects earnings. The Company recorded transaction gains of
$744,000, $1,566,000 and $2,046,000 in 2004, 2003 and 2002,
respectively, in interest and other income, net.
The Company enters into derivative financial instrument
contracts only for hedging purposes and accounts for them in
accordance with Statement of Financial Accounting Standard
(SFAS) No. 133 and its amendments
SFAS No. 137, “Accounting for Derivative
Instruments and Hedging Activities-Deferral of the
F-8
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Effective Date of SFAS No. 133,”
SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities” and
SFAS No. 149, “Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities.” The purpose
of these derivative instruments is to minimize the variability
of cash flows associated with the anticipated transactions being
hedged. As changes in foreign currency rates impact the United
States dollar value of anticipated transactions, the fair value
of the forward contracts also changes, offsetting foreign
currency rate fluctuations. Changes in the fair value of
derivatives are recorded each period in income or other
comprehensive income, depending on whether the derivatives are
designated as hedges and, if so, the types and effectiveness of
hedges.
Additional information about the Company’s use of
derivative instruments is presented in Note 8.
|
|
|
Earnings Per Common Share |
Basic earnings per common share is calculated by dividing net
income for the period by the weighted-average number of common
shares outstanding during the period. Diluted earnings per
common share is calculated by dividing net income for the period
by the sum of the weighted-average number of common shares
outstanding during the period, plus the number of potentially
dilutive common shares (“dilutive securities”) that
were outstanding during the period. Dilutive securities include
shares owned by the Callaway Golf Company Grantor Stock Trust,
options granted pursuant to the Company’s stock option
plans, potential shares related to the Employee Stock Purchase
Plan, rights to purchase preferred shares under the Callaway
Golf Company Shareholder Rights Plan and Restricted Stock grants
to employees and non-employees (Note 10). Dilutive
securities related to the Callaway Golf Company Grantor Stock
Trust and the Company’s stock option plans are included in
the calculation of diluted earnings per common share using the
treasury stock method. Under the treasury stock method, the
dilutive securities related to the Callaway Golf Company Grantor
Stock Trust do not have any impact upon the diluted earnings per
common share. Dilutive 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 Golf Shareholder Rights Plan have not
been included as dilutive securities because the conditions
necessary to cause these rights to be exercisable were not met.
Potentially dilutive securities are excluded from the
computation of earnings per share in periods in which a net loss
is reported, as their effect would be antidilutive. A
reconciliation of the numerators and denominators of the basic
and diluted earnings per common share calculations for the years
ended December 31, 2004, 2003 and 2002 is presented in
Note 9.
|
|
|
Cash and Cash Equivalents |
Cash equivalents are highly liquid investments purchased with
original maturities of three months or less.
|
|
|
Allowance for Doubtful Accounts |
The Company maintains an allowance for estimated losses
resulting from the failure of its customers to make required
payments. An estimate of uncollectable amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. If the actual uncollected
amounts significantly exceed the estimated allowance, the
Company’s operating results would be significantly
adversely affected.
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Inventories include material, labor and manufacturing overhead
costs.
F-9
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
|
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 as follows:
| |
|
|
|
Buildings and improvements
|
|
10-30 years |
|
Machinery and equipment
|
|
5-15 years |
|
Furniture, computers and equipment
|
|
3-5 years |
|
Production molds
|
|
2 years |
Normal repairs and maintenance costs are expensed as incurred.
Expenditures that materially increase values, change capacities
or extend useful lives are capitalized. Replacements are
capitalized and the property, plant, and equipment accounts are
relieved of the items being replaced. The related costs and
accumulated depreciation of disposed assets are eliminated and
any resulting gain or loss on disposition is included in income.
Construction in-process consists primarily of store display
equipment not yet assembled and installed, in-process internally
developed software and unfinished molds that have not yet been
placed in service.
In accordance with AICPA Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use,” the Company capitalizes certain
costs incurred in connection with developing or obtaining
internal use software. Costs incurred in the preliminary project
stage are expensed. All direct external costs incurred to
develop internal-use software during the development stage are
capitalized and amortized using the straight-line method over
the remaining estimated useful lives. Costs such as maintenance
and training are expensed as incurred.
During the fourth quarter of 2003, in connection with the
Top-Flite Acquisition (Note 3), the Company began
consolidating the Callaway Golf and Top-Flite golf club and golf
ball manufacturing and research and development operations. In
connection with this consolidation, the Company disposed of
certain long-lived assets. As a result, the Company reduced the
carrying value of its golf ball assets and therefore incurred
pre-tax charges to earnings in the amounts of $5,677,000 and
$24,080,000 during 2004 and 2003, respectively.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” the
Company assesses potential impairments of its long-lived assets
whenever events or changes in circumstances indicate that the
asset’s carrying value may not be recoverable. An
impairment loss would be recognized when the carrying amount of
a long-lived asset or asset group is not recoverable and exceeds
its fair value. The carrying amount of a long-lived asset or
asset group is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset or asset group.
|
|
|
Goodwill and Intangible Assets |
Goodwill and intangible assets consist of goodwill, trade name,
trademark, trade dress, patents and other intangible assets
acquired during the acquisition of FrogTrader, Inc., Odyssey
Sports, Inc., Top-Flite Golf Company and certain foreign
distributors. See Note 3, for further discussion of the
intangible assets acquired in connection with the FrogTrader and
Top-Flite Acquisitions.
In June 2001, the FASB issued SFAS No. 142,
“Goodwill and Other Intangible Assets.” Under
SFAS No. 142, acquired intangible assets must be
separately identified. Goodwill and other intangible assets with
indefinite lives are not amortized, but are reviewed at least
annually for impairment. Acquired intangible assets with
definite lives are amortized over their individual useful lives.
In addition to goodwill, the Company’s intangible assets
with indefinite lives consist of trade name, trademark and trade
dress. In accordance with SFAS No. 142, the goodwill
and other intangible assets with indefinite lives that were being
F-10
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
amortized over periods ranging from five to 40 years follow
the non-amortization approach beginning January 1, 2002.
Patents and other intangible assets are amortized using the
straight-line method over periods ranging from less than one
year to sixteen years (Note 6).
The Company has stock-based compensation plans, which are
described in Note 10. The Company accounts for its
stock-based employee compensation plans using the recognition
and measurement principles (intrinsic value method) of
Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. The Company
accounts for its stock-based non-employee compensation plans
using SFAS No. 123, “Accounting for Stock-Based
Compensation.” All employee stock option 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 for those awards. For the years
ended December 31, 2004, 2003 and 2002, the Company
recorded compensation expense of $1,741,000, $15,000 and
$314,000, in net income as a result of restricted stock awards
and certain options to purchase shares of stock granted to
employees, officers, professional endorsers and consultants of
the Company. Pro forma disclosures of net income (loss) and
earnings (loss) per share, as if the fair value-based
recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” had been
applied in measuring stock-based employee compensation expense,
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net income (loss), as reported
|
|
$ |
(10,103 |
) |
|
$ |
45,523 |
|
|
$ |
69,446 |
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
84 |
|
|
|
10 |
|
|
|
114 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(6,605 |
) |
|
|
(9,839 |
) |
|
|
(11,003 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(16,624 |
) |
|
$ |
35,694 |
|
|
$ |
58,557 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
(0.15 |
) |
|
$ |
0.69 |
|
|
$ |
1.04 |
|
| |
Basic — pro forma
|
|
$ |
(0.25 |
) |
|
$ |
0.54 |
|
|
$ |
0.88 |
|
| |
Diluted — as reported
|
|
$ |
(0.15 |
) |
|
$ |
0.68 |
|
|
$ |
1.03 |
|
| |
Diluted — pro forma
|
|
$ |
(0.25 |
) |
|
$ |
0.54 |
|
|
$ |
0.88 |
|
The pro forma amounts reflected above may not be representative
of future disclosures since the estimated fair value of stock
options is amortized to expense as the options vest and
additional options may be 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, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Dividend yield
|
|
|
1.9% |
|
|
|
1.7% |
|
|
|
1.7% |
|
|
Expected volatility
|
|
|
42.6% |
|
|
|
46.1% |
|
|
|
52.2% |
|
|
Risk free interest rates
|
|
|
2.74% - 4.26% |
|
|
|
2.26% - 2.75% |
|
|
|
1.94% - 2.37% |
|
|
Expected lives
|
|
|
3-4 years |
|
|
|
3-4 years |
|
|
|
3-4 years |
|
F-11
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The weighted-average grant-date fair value of options granted
during 2004, 2003 and 2002 was $4.80, $6.74 and $6.17 per
share, respectively. 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 grants under the Company’s employee stock-based
compensation plans.
Current income tax expense (benefit) is the amount of income
taxes expected to be paid (refunded) for the current year. A
deferred income tax asset or liability is established for the
expected future consequences resulting from temporary
differences in the financial reporting and tax bases of assets
and liabilities. Deferred income tax expense (benefit) is the
net change during the year in the deferred income tax asset or
liability.
Deferred taxes have not been provided on the cumulative
undistributed earnings of foreign subsidiaries since such
amounts are expected to be reinvested indefinitely. The Company
provides a valuation allowance for its deferred tax assets when,
in the opinion of management, it is more likely than not that
such assets will not be realized (Note 12).
|
|
|
Interest and Other Income, Net |
Interest and other income, net primarily includes gains and
losses on foreign currency transactions, interest income and
gains and losses on investments to fund the deferred
compensation plan. The components of interest and other income,
net are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Foreign currency gains
|
|
$ |
744 |
|
|
$ |
1,567 |
|
|
$ |
2,046 |
|
|
Interest income
|
|
|
745 |
|
|
|
1,098 |
|
|
|
— |
|
|
Gains on deferred compensation plan assets
|
|
|
360 |
|
|
|
888 |
|
|
|
156 |
|
|
Other
|
|
|
85 |
|
|
|
(3 |
) |
|
|
69 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,934 |
|
|
$ |
3,550 |
|
|
$ |
2,271 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Other Accumulated Comprehensive Income (Loss) |
Components of comprehensive income are reported in the financial
statements in the period in which they are recognized. The
components of comprehensive income for the Company include net
income, unrealized gains or losses on cash flow hedges, foreign
currency translation adjustments and unrealized gains or losses
on marketable securities. Since the Company has met the
indefinite reversal criteria, it does not accrue income taxes on
foreign currency translation adjustments. During 2004, no gains
or losses were
F-12
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
reclassified to earnings as a result of the discontinuance of
cash flow hedges. The components of accumulated other
comprehensive income (loss) are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Unrealized gain (loss) on cash flow hedges
|
|
$ |
2,270 |
|
|
$ |
(1,669 |
) |
|
$ |
(918 |
) |
|
Equity adjustment from foreign currency translation
|
|
|
8,811 |
|
|
|
4,559 |
|
|
|
(2,837 |
) |
|
Unrealized loss on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
(92 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
11,081 |
|
|
$ |
2,890 |
|
|
$ |
(3,847 |
) |
| |
|
|
|
|
|
|
|
|
|
The Company’s operating segments are organized on the basis
of products and consist of Golf Clubs and Golf Balls. The Golf
Clubs segment consists primarily of Callaway Golf, Top-Flite and
Ben Hogan woods, irons, wedges and putters as well as Odyssey
putters, other golf-related accessories and royalty and other
income. The Golf Balls segment consists primarily of Callaway
Golf, Top-Flite and Ben Hogan golf balls that are designed,
manufactured and sold by the Company. The Company also discloses
information about geographic areas. This information is
presented in Note 14.
|
|
|
Diversification of Credit Risk |
The Company’s financial instruments that are subject to
concentrations of credit risk consist primarily of cash
equivalents, trade receivables and foreign currency contracts.
The Company historically 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,
sporting goods retailers and mass merchants, directly and
through wholly-owned domestic and foreign subsidiaries, and to
foreign distributors. The Company performs ongoing credit
evaluations of its customers’ financial condition and
generally requires no collateral from these customers. The
Company maintains reserves for estimated credit losses, which it
considers adequate to cover any such losses. Managing
customer-related credit risk is more difficult in regions
outside of the United States. During 2004, 2003 and 2002,
approximately 42%, 45% and 45%, respectively, of the
Company’s net sales were made in regions outside of the
United States. An adverse change in either economic conditions
abroad or in the Company’s relationship with significant
foreign retailers could significantly increase the
Company’s credit risk related to its international
operations.
The Company enters into forward exchange rate contracts and put
or call options for the purpose of hedging foreign exchange rate
exposures on existing or anticipated transactions. In the event
of a failure to honor one of these contracts by one of the banks
with which the Company has contracted, management believes any
loss would be limited to the exchange rate differential from the
time the contract was made until the time it was compensated.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123
(revised 2004) (“SFAS 123R”), Share-Based
Payment. This Statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation and supersedes
ABP Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123R addresses the accounting
F-13
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the
intrinsic value method under APB Opinion No. 25,
Accounting for Stock Issued to Employees, and generally
would require instead that such transactions be accounted for
using a fair-value-based method. The Company is currently
evaluating SFAS No. 123R to determine which
fair-value-based model and transitional provision it will follow
upon adoption. SFAS No. 123R will be effective for the
Company beginning in its third quarter of fiscal 2005. Although
the Company will continue to evaluate the application of SFAS
No. 123R, management expects adoption to have a material
impact on its results of operations in amounts that are
currently undeterminable.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets — An amendment
of APB Opinion No. 29, Accounting for Nonmonetary
Transactions”. This statement amends APB Opinion
No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provision
in SFAS No. 153 are effective for nonmonetary asset
exchanges incurred during fiscal years beginning after
June 15, 2005. The Company is currently evaluating the
effect, if any, of adopting SFAS No. 153.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs”, which amends ARB Opinion
No. 43, Chapter 4, “Inventory Pricing”. SFAS
No. 151 clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage) to be expensed as incurred and not included
in overhead. Further, SFAS No. 151 requires that allocation
of fixed production overheads to conversion costs should be
based on normal capacity of the production facilities. The
provisions in SFAS No. 151 are effective for inventory cost
incurred during fiscal years beginning after June 15, 2005.
The Company’s current accounting policies are consistent
with the accounting practices addressed under SFAS No. 151.
In October 2004 the FASB issued Staff Position No. 109-2
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004” (“FSP 109-2”).
FSP 109-2 provides guidance under SFAS No. 109,
“Accounting for Income Taxes,” with respect to
recording the potential impact of the repatriation provisions of
the American Jobs Creation Act of 2004 (the “Jobs
Act”) on enterprises’ income tax expense and deferred
tax liability. The Jobs Act was enacted on October 22,
2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate
the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying SFAS
No. 109. The Company has not completed the evaluation of
the impact of the repatriation provisions. Accordingly, as of
December 31, 2004, the Company has not adjusted its tax
expense or deferred tax liability to reflect the repatriation
provisions of the Jobs Act.
Note 3. Business
Acquisitions
|
|
|
FrogTrader Stock Purchase |
On May 28, 2004, the Company acquired all of the issued and
outstanding shares of stock of FrogTrader, Inc.
(“FrogTrader”). The Company’s consolidated
statements of operations include the financial results of
FrogTrader for the period from the acquisition date of
May 28, 2004. The Company acquired FrogTrader to stimulate
purchases of new clubs by growing the Trade In! Trade Up!
program and to enable the Company to better manage the
distribution of pre-owned golf clubs and the Callaway Golf brand.
F-14
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The FrogTrader acquisition was accounted for as a purchase in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 141, “Business
Combinations.” Under SFAS No. 141, the aggregate
cost of the acquired stock was $15,175,000, which included
transaction costs of approximately $218,000, and was paid
entirely in cash. The aggregate acquisition costs exceeded the
estimated fair value of the net assets acquired. As a result,
the Company has recorded goodwill of $9,097,000, none of which
is deductible for tax purposes. The Company has recorded the
fair values of FrogTrader’s internally developed software
and certain customer information based on an assessment from an
outside valuation company received during 2004. The allocation
of the aggregate acquisition costs is as follows (in thousands):
| |
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
| |
Cash
|
|
$ |
5,971 |
|
| |
Accounts receivable
|
|
|
85 |
|
| |
Inventory
|
|
|
1,962 |
|
| |
Other current assets
|
|
|
1,475 |
|
| |
Property, plant and equipment
|
|
|
258 |
|
| |
Internally developed software
|
|
|
1,200 |
|
| |
Customer lists
|
|
|
700 |
|
| |
Goodwill
|
|
|
9,097 |
|
|
Liabilities:
|
|
|
|
|
| |
Current liabilities
|
|
|
(5,567 |
) |
| |
Long-term liabilities
|
|
|
(6 |
) |
| |
|
|
|
| |
|
Total net assets acquired
|
|
$ |
15,175 |
|
| |
|
|
|
Top-Flite Asset Purchase
On September 15, 2003, the Company acquired through a
court-approved sale substantially all of the golf-related assets
of TFGC Estate Inc. (f/k/a The Top-Flite Golf Company, f/k/a
Spalding Sports Worldwide, Inc.) and thereafter completed the
valuation and settlement of certain additional assets related to
the international operations of TFGC Estate Inc. (the
“Top-Flite Acquisition”). The settlement of the
international assets was effective October 1, 2003. Assets
located in the United States were acquired by the Company’s
newly-formed, wholly-owned subsidiary, The Top-Flite Golf
Company. Foreign assets were acquired by the Company’s
existing wholly-owned subsidiaries in the relevant countries.
The acquisition of the Top-Flite assets provided a unique
opportunity to significantly increase the size and profitability
of the Company’s golf ball business and the Company was
able to purchase the acquired assets at less than their
estimated fair value. The Company paid the cash purchase price
for the Top-Flite Acquisition from cash on hand. The Company
intends to continue the U.S. and foreign operations of the
acquired golf assets, including the use of acquired assets in
the manufacturing of golf balls and golf clubs and the
commercialization of the Top-Flite and Ben Hogan brands, patents
and trademarks.
The Company’s consolidated statements of operations include
the Company’s Top-Flite business results of operations in
the United States from September 15, 2003 forward and the
Company’s Top-Flite business results of operations outside
the United States from October 1, 2003 forward.
The Top-Flite Acquisition was accounted for as a purchase in
accordance with SFAS No. 141 “Business
Combinations.” Under SFAS No. 141, the estimated
aggregate cost of the acquired assets was $182,960,000, which
includes cash paid of $154,145,000, transaction costs of
approximately $6,331,000, and assumed liabilities of
approximately $22,484,000. The estimated fair value of the net
assets acquired exceeded the estimated aggregate acquisition
costs. As a result, the Company was required to reduce the
carrying value of
F-15
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
the acquired long-term assets on a pro rata basis. The
allocation of the aggregate acquisition costs is as follows (in
thousands):
| |
|
|
|
|
|
|
Assets Assumed:
|
|
|
|
|
| |
Accounts receivable
|
|
$ |
45,360 |
|
| |
Inventory
|
|
|
32,746 |
|
| |
Other assets
|
|
|
1,147 |
|
| |
Property and equipment
|
|
|
55,775 |
|
| |
Intangible assets (Note 6)
|
|
|
47,932 |
|
|
Liabilities Assumed:
|
|
|
|
|
| |
Current liabilities
|
|
|
(17,398 |
) |
| |
Long-term liabilities
|
|
|
(5,086 |
) |
| |
|
|
|
|
Total net assets acquired
|
|
$ |
160,476 |
|
| |
|
|
|
Pro Forma Results of Operations
The following sets forth the Company’s pro forma results of
operations for the year ended December 31, 2003, as if the
acquisition of the Top-Flite golf operations had taken place at
the beginning of the period presented. No pro forma information
has been included relating to the FrogTrader acquisition, as
this acquisition was deemed insignificant (in thousands, except
per share
data)(1).
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
2003 | |
| |
|
| |
|
Net sales
|
|
$ |
1,005,070 |
|
|
Net income
|
|
$ |
33,471 |
|
|
Earnings per common share:
|
|
|
|
|
| |
Basic
|
|
$ |
0.51 |
|
| |
Diluted
|
|
$ |
0.50 |
|
|
|
| (1) |
Until September 15, 2003, the Top-Flite golf business was
operated as a part of, and was integrated with, the other
businesses of Spalding Sports Worldwide. The pro forma results
of operations presented above therefore are based upon an
estimated allocation of personnel and costs with regard to the
manner in which the Top-Flite golf business was structured and
operated as part of Spalding Sports Worldwide. The allocated
personnel and costs are not necessarily indicative of the
personnel and costs that would have been included had the
Top-Flite business been operated as part of Callaway Golf
Company since the beginning of the periods presented. As a
result, the pro forma results of operations are not necessarily
indicative of the results of operations had the acquisition been
completed at the beginning of the period presented. |
Note 4. Change in
Accounting Estimate
In preparing its financial statements, the Company is required
to make certain estimates, including those related to provisions
for warranty, uncollectable accounts receivable, inventory
obsolescence, valuation allowance for deferred tax assets and
the market value of derivative instruments. The Company
periodically reviews its estimates to ensure that the estimates
appropriately reflect changes in its business or as new
information becomes available.
The Company has a stated two-year warranty policy for its golf
clubs, although the Company’s historical practice has been
to honor warranty claims well after the two-year stated warranty
period. Prior to the third
F-16
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
quarter of 2002, the Company’s method of estimating both
its implicit 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, such as the introduction of products with new technology
or materials that would be more susceptible to failure or
breakage, and other business risks, such as increased warranty
liability as a result of acquisitions. In many cases, additions
to the warranty reserve for new product introductions have been
based on management’s judgment of possible future claims
derived from the limited product failure data that was available
at the time.
Beginning in the second quarter of 2001, the Company began to
compile data that illustrated the timing of warranty claims in
relation to product life cycles. In the third quarter of 2002,
the Company determined it had gathered sufficient data and
concluded it should enhance its warranty accrual estimation
methodology to utilize the additional data. The analysis of the
data, in management’s judgment, provided management with
more insight into timing of claims and demonstrated that some
product failures are more likely to occur early in a
product’s life cycle while other product failures occur in
a more linear fashion over the product’s life cycle. As a
result of its analysis of additional information, the Company
believes it has gained better insight and improved judgment to
more accurately project the ultimate failure rates of its
products. As a result of this refinement in its methodology, the
Company concluded that it should change its methodology of
estimating warranty accruals and reduce its warranty reserve by
approximately $17,000,000. The $17,000,000 reduction is recorded
in cost of sales and favorably impacted gross profit as a
percentage of net sales by two percentage points for the
year ended December 31, 2002. The change in methodology has
been accounted for as a change in accounting principle
inseparable from a change in estimate.
F-17
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| Note 5. |
Selected Financial Statement Information |
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
| |
Trade accounts receivable
|
|
$ |
112,523 |
|
|
$ |
106,856 |
|
| |
Allowance for doubtful accounts
|
|
|
(7,370 |
) |
|
|
(6,192 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
105,153 |
|
|
$ |
100,664 |
|
| |
|
|
|
|
|
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
| |
Raw materials
|
|
$ |
73,558 |
|
|
$ |
76,122 |
|
| |
Work-in-process
|
|
|
6,768 |
|
|
|
9,129 |
|
| |
Finished goods
|
|
|
114,505 |
|
|
|
118,744 |
|
| |
|
|
|
|
|
|
| |
|
|
194,831 |
|
|
|
203,995 |
|
| |
Reserve for excess and obsolescence
|
|
|
(13,601 |
) |
|
|
(18,606 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
181,230 |
|
|
$ |
185,389 |
|
| |
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
| |
Land
|
|
$ |
12,809 |
|
|
$ |
12,805 |
|
| |
Buildings and improvements
|
|
|
92,703 |
|
|
|
91,148 |
|
| |
Machinery and equipment
|
|
|
128,462 |
|
|
|
129,270 |
|
| |
Furniture, computers and equipment
|
|
|
93,390 |
|
|
|
90,571 |
|
| |
Production molds
|
|
|
28,936 |
|
|
|
26,968 |
|
| |
Construction-in-process
|
|
|
10,663 |
|
|
|
2,920 |
|
| |
|
|
|
|
|
|
| |
|
|
366,963 |
|
|
|
353,682 |
|
| |
Accumulated depreciation
|
|
|
(231,098 |
) |
|
|
(188,919 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
135,865 |
|
|
$ |
164,763 |
|
| |
|
|
|
|
|
|
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
16,658 |
|
|
$ |
24,343 |
|
| |
Accrued expenses
|
|
|
58,843 |
|
|
|
55,444 |
|
| |
|
|
|
|
|
|
| |
|
$ |
75,501 |
|
|
$ |
79,787 |
|
| |
|
|
|
|
|
|
|
Accrued employee compensation and benefits:
|
|
|
|
|
|
|
|
|
| |
Accrued payroll and taxes
|
|
$ |
10,411 |
|
|
$ |
16,577 |
|
| |
Accrued vacation and sick pay
|
|
|
8,581 |
|
|
|
8,126 |
|
| |
Accrued commissions
|
|
|
1,223 |
|
|
|
841 |
|
| |
|
|
|
|
|
|
| |
|
$ |
20,215 |
|
|
$ |
25,544 |
|
| |
|
|
|
|
|
|
F-18
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| Note 6. |
Goodwill and Intangible Assets |
Effective January 1, 2002, the Company adopted
SFAS No. 142, “Goodwill and Other Intangible
Assets.” As a result of adopting SFAS No. 142,
the Company’s goodwill and certain intangible assets are no
longer amortized, but are subject to an annual impairment test.
The following sets forth the intangible assets by major asset
class:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
Useful | |
|
| |
|
| |
| |
|
Life | |
|
|
|
Accumulated | |
|
Net Book | |
|
|
|
Accumulated | |
|
Net Book | |
| |
|
(Years) | |
|
Gross | |
|
Amortization | |
|
Value | |
|
Gross | |
|
Amortization | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
Non-Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trade name, trademark and trade dress
|
|
|
|
|
|
$ |
121,794 |
|
|
$ |
— |
|
|
$ |
121,794 |
|
|
$ |
120,605 |
|
|
$ |
— |
|
|
$ |
120,605 |
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Patents
|
|
|
3-16 |
|
|
|
35,307 |
|
|
|
9,787 |
|
|
|
25,520 |
|
|
|
32,277 |
|
|
|
7,251 |
|
|
|
25,026 |
|
| |
Other
|
|
|
1-9 |
|
|
|
3,080 |
|
|
|
1,226 |
|
|
|
1,854 |
|
|
|
4,386 |
|
|
|
382 |
|
|
|
4,004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$ |
160,181 |
|
|
$ |
11,013 |
|
|
$ |
149,168 |
|
|
$ |
157,268 |
|
|
$ |
7,633 |
|
|
$ |
149,635 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense on intangible assets was
approximately $3,380,000 for the year ended December 31,
2004. Amortization expense related to intangible assets at
December 31, 2004 in each of the next five fiscal years and
beyond is expected to be incurred as follows:
| |
|
|
|
|
| |
|
(In thousands) | |
|
2005
|
|
$ |
3,042 |
|
|
2006
|
|
|
2,992 |
|
|
2007
|
|
|
2,988 |
|
|
2008
|
|
|
2,948 |
|
|
2009
|
|
|
2,768 |
|
|
Thereafter
|
|
|
12,636 |
|
| |
|
|
|
| |
|
$ |
27,374 |
|
| |
|
|
|
In connection with the settlement of the Perfect Putter
litigation, the Company, among other things, acquired certain
patents and other intellectual property owned by Perfect Putter.
As of December 31, 2004, the estimated value assigned to
the acquired Perfect Putter intellectual property was
$2,300,000. The final valuation of the acquired intellectual
property is to be determined by an independent valuation
company. It is anticipated that the final assessment will be
completed during the first half of 2005 and will not differ
materially from the preliminary value recorded.
In accordance with SFAS No. 142, the Company has
completed the annual impairment tests and fair value analysis
for goodwill and other non-amortizing intangible assets,
respectively, held throughout the year. There were no
impairments or impairment indicators present and no loss was
recorded during the year ended December 31, 2004. The value
of the trade names and other intangible assets acquired in
connection with the FrogTrader and Top-Flite acquisitions were
determined through an independent valuation. Changes in goodwill
during the year ended December 31, 2004 consisted of
$9,097,000 of goodwill added in connection with the FrogTrader
acquisition, as well as, $1,155,000 in foreign currency
fluctuations. The $2,014,000 increase in goodwill during the
year ended December 31, 2003, was due entirely to foreign
currency fluctuations.
F-19
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| Note 7. |
Financing Arrangements |
Effective November 5, 2004, the Company amended and
restated its line of credit to provide for a new five year
revolving line of credit from Bank of America, N.A. and certain
other lenders (the “Line of Credit”), providing for
revolving loans of up to $250,000,000 (with the possible
expansion of the Line of Credit to $300,000,000 upon the
satisfaction of certain conditions and the agreement of the
lenders). Actual borrowing availability under the Line of Credit
is effectively limited by the financial covenants set forth in
the agreement governing the Line of Credit. At December 31,
2004, the maximum amount that could be borrowed under the Line
of Credit was approximately $141,269,000 of which $13,000,000
was outstanding.
Under the Line of Credit, the Company is required to pay certain
fees, including an unused commitment fee of between 17.5 to
35.0 basis points per annum of the unused commitment
amount, with the exact amount determined based upon the
Company’s consolidated leverage ratio and trailing four
quarters EBITDA (each as defined in the agreement governing the
Line of Credit). Outstanding borrowings under the Line of Credit
accrue interest, at the Company’s election, based upon the
Company’s consolidated leverage ratio and trailing four
quarters EBITDA, of (i) the higher of (a) the Federal
Funds Rate plus 50.0 basis points or (b) Bank of
America’s prime rate, and in either case, plus a margin of
00.0 to 75.0 basis points or (ii) the Eurodollar Rate
(as defined in the agreement governing the Line of Credit) plus
a margin of 75.0 to 200.0 basis points. The Company has
agreed that repayment of amounts under the Line of Credit will
be guaranteed by certain of the Company’s domestic
subsidiaries and will be secured by substantially all of the
assets of the Company and such guarantor subsidiaries. The
collateral (other than 65% of the stock of the Company’s
foreign subsidiaries) could be released upon the satisfaction of
certain financial conditions.
The agreement governing the Line of Credit requires the Company
to maintain certain financial covenants, including a maximum
leverage ratio, a minimum asset coverage ratio, a maximum
capitalization ratio, a minimum interest coverage ratio and a
minimum consolidated EBITDA. The agreement also includes certain
other restrictions, including restrictions limiting additional
indebtedness, dividends, stock repurchases, transactions with
affiliates, capital expenditures, asset sales, acquisitions,
mergers, liens and encumbrances and other restrictions. The
agreement also contains other provisions, including affirmative
covenants, representations and warranties and events of default.
As of the December 31, 2004, the Company was in compliance
with the covenants and other terms thereof.
The total origination fees incurred in connection with the Line
of Credit were $1,263,000 and are being amortized into interest
expense over five years (the term of the Line of Credit
agreement). The unamortized origination fees were $1,221,000 as
of December 31, 2004 and have been included in prepaid and
other current assets in the accompanying consolidated balance
sheet.
|
|
| Note 8. |
Derivatives and Hedging |
The Company uses derivative financial instruments to manage its
exposures to foreign exchange rates. The derivative instruments
are accounted for pursuant to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” as amended by SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain
Hedging Activities.” As amended, SFAS No. 133
requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet, measure those
instruments at fair value and recognize changes in the fair
value of derivatives in earnings in the period of change unless
the derivative qualifies as an effective hedge that offsets
certain exposures.
|
|
|
Foreign Currency Exchange Contracts |
The Company enters into foreign exchange contracts to hedge
against exposure to changes in foreign currency exchange rates.
Such contracts are designated at inception to the related
foreign currency exposures being hedged, which include
anticipated intercompany sales of inventory denominated in
foreign currencies,
F-20
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
payments due on intercompany transactions from certain
wholly-owned foreign subsidiaries, and anticipated sales by the
Company’s wholly-owned European subsidiary for certain
Euro-denominated transactions. Hedged transactions are
denominated primarily in British Pounds, Euros, Japanese Yen,
Korean Won, Canadian Dollars and Australian Dollars. To achieve
hedge accounting, contracts must reduce the foreign currency
exchange rate risk otherwise inherent in the amount and duration
of the hedged exposures 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 options. Foreign currency derivatives
are used only to meet the Company’s objectives of
minimizing variability in the Company’s operating results
arising from foreign exchange rate movements. The Company does
not enter into foreign exchange contracts for speculative
purposes. Hedging contracts mature within twelve months from
their inception.
At December 31, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts were
approximately $52,736,000, $91,222,000 and $134,782,000,
respectively. The Company estimates the fair values of
derivatives 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, 2004, current
liabilities related to the fair value of foreign
currency-related derivatives were $2,981,000. There were no
current assets related to the fair values of foreign
currency-related derivatives. At December 31, 2003, the
fair values of foreign currency-related derivatives were
recorded as current assets of $50,000 and current liabilities of
$799,000.
At December 31, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts designated as
cash flow hedges were approximately $0, $44,443,000 and
$84,843,000, respectively. For derivative instruments that are
designated and qualify as cash flow hedges, the effective
portion of the gain or loss on the derivative instrument is
initially recorded in accumulated other comprehensive income
(“OCI”) as a separate component of shareholders’
equity and subsequently reclassified into earnings in the period
during which the hedged transaction is recognized.
During the years ended December 31, 2004 and 2003, no gains
or losses were reclassified into earnings as a result of the
discontinuance of cash flow hedges. During the year ended
December 30, 2002, gains of $171,000 were reclassified into
earnings as a result of the discontinuance of cash flow hedges.
The ineffective portion of the gain or loss for derivative
instruments that are designated and qualify as cash flow hedges
is immediately reported as a component of interest and other
income. For foreign currency contracts designated as cash flow
hedges, hedge effectiveness is measured using the spot rate.
Changes in the spot-forward differential are excluded from the
test of hedging effectiveness and are recorded currently in
earnings as a component of interest and other income. During the
years ended December 31, 2004, 2003 and 2002, the Company
recorded net gains/losses of $103,000 loss, $38,000 gain and
$376,000 gain, respectively, as a result of changes in the
spot-forward differential. Assessments of hedge effectiveness
are performed using the dollar offset method and applying a
hedge effectiveness ratio between 80% and 125%. Given that both
the hedged item and the hedging 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, 2004, 2003 and 2002, the notional amounts
of the Company’s foreign exchange contracts used to hedge
outstanding balance sheet exposures were approximately
$52,736,000, $46,779,000 and $49,939,000, respectively. The
gains and losses on foreign currency contracts used to hedge
balance sheet exposures are recognized as a component of
interest and other income in the same period as the
remeasurement gain and loss of the related foreign currency
denominated assets and liabilities and thus offset these gains
and losses. During the years ended December 31, 2004, 2003
and 2002, the Company recorded net losses of $4,577,000,
$6,838,000 and $8,148,000, respectively, due to net realized and
unrealized gains and losses on contracts used to hedge balance
sheet exposures.
F-21
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| Note 9. |
Earnings Per Common Share |
The schedule below summarizes the elements included in the
calculation of basic and diluted earnings (loss) per common
share for the years ended December 31, 2004, 2003 and 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, | |
| |
|
except per share data) | |
|
Net income (loss)
|
|
$ |
(10,103 |
) |
|
$ |
45,523 |
|
|
$ |
69,446 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted-average shares outstanding — Basic
|
|
|
67,721 |
|
|
|
66,027 |
|
|
|
66,517 |
|
| |
Dilutive securities
|
|
|
— |
|
|
|
444 |
|
|
|
757 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted-average shares outstanding — Diluted
|
|
|
67,721 |
|
|
|
66,471 |
|
|
|
67,274 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.15 |
) |
|
$ |
0.69 |
|
|
$ |
1.04 |
|
| |
Diluted
|
|
$ |
(0.15 |
) |
|
$ |
0.68 |
|
|
$ |
1.03 |
|
Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Options
with an exercise price in excess of the average market value of
the Company’s common stock during the period have been
excluded from the calculation as their effect would be
antidilutive. Additionally, potentially dilutive securities are
excluded from the computation of earnings per share in periods
in which a net loss is reported as their effect would be
antidilutive. Thus, weighted-average shares
outstanding — Diluted is the same as weighted-average
shares outstanding — Basic in periods when a net loss
is reported. For the years ended December 31, 2004, 2003
and 2002, options outstanding totaling 10,312,000 shares,
10,606,000 shares and 14,177,000 shares, respectively,
were excluded from the calculations of earnings per common
share, as their effect would have been antidilutive.
|
|
| Note 10. |
Stock, Stock Options and Rights |
|
|
|
Common Stock and Preferred Stock |
The Company has an authorized capital of
243,000,000 shares, $.01 par value, of which
240,000,000 shares are designated Common Stock, and
3,000,000 shares are designated Preferred Stock. Of the
Preferred Stock, 240,000 shares are designated Series A
Junior Participating Preferred Stock in connection with the
Company’s shareholders’ rights plan (see
Shareholders’ Rights Plan below). The remaining shares of
Preferred Stock are undesignated as to series, rights,
preferences, privileges or restrictions.
The holders of Common Stock are entitled to one vote for each
share of Common Stock on all matters submitted to a vote of the
Company’s shareholders. Although to date no shares of
Series A Junior Participating Preferred Stock have been
issued, if such shares were issued, each share of Series A
Junior Participating Preferred Stock would entitle the holder
thereof to 1,000 votes on all matters submitted to a vote of the
shareholders of the Company. The holders of Series A Junior
Participating Preferred Stock and the holders of Common Stock
shall generally vote together as one class on all matters
submitted to a vote of the Company’s shareholders.
Shareholders entitled to vote for the election of directors are
entitled to vote cumulatively for one or more nominees.
F-22
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In 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 the
Company of $100,000,000 and $50,000,000, respectively. The
following schedule summarizes the Company’s repurchase
programs:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Shares | |
|
Cost Per | |
|
Shares | |
|
Cost Per | |
|
Shares | |
|
Cost Per | |
| |
|
Repurchased | |
|
Share | |
|
Repurchased | |
|
Share | |
|
Repurchased | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Authority Announced in August 2001
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
866 |
|
|
$ |
17.86 |
|
|
Authority Announced in May 2002
|
|
|
353 |
|
|
$ |
17.84 |
|
|
|
373 |
|
|
$ |
12.77 |
|
|
|
1,967 |
|
|
$ |
15.75 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
353 |
|
|
$ |
17.84 |
|
|
|
373 |
|
|
$ |
12.77 |
|
|
|
2,833 |
|
|
$ |
16.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has completed its August 2001 repurchase program. As
of December 31, 2004, the Company is authorized to
repurchase up to $7,968,000 of its Common Stock under the
repurchase program announced in May 2002. The Company’s
repurchases of shares of Common Stock are recorded at average
cost in Common Stock held in treasury and result in a reduction
of shareholders’ equity.
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 employee stock option exercises and employee stock
plan purchases. The existence of the GST will have no impact
upon the amount of benefits or compensation that will be paid
under the Company’s employee benefit plans. The GST
acquires, holds and distributes shares of the Company’s
Common Stock in accordance with the terms of the trust. Shares
held by the GST are voted in accordance with voting directions
from eligible employees of the Company as specified in the GST.
In conjunction with the formation of the GST, the Company issued
4,000,000 shares of newly issued Common Stock to the GST in
exchange for a promissory note in the amount of $60,575,000
($15.14 per share). In December 1995, the Company issued an
additional 1,300,000 shares of newly issued Common Stock to
the GST in exchange for a promissory note in the amount of
$26,263,000 ($20.20 per share). In July 2001, the Company
issued 5,837,000 shares of Common Stock held in treasury to
the GST in exchange for a promissory note in the amount of
$90,282,000 ($15.47 per share). The issuance of these
shares to the GST had no net impact on shareholders’ equity.
For financial reporting purposes, the GST is consolidated with
the Company. The value of shares owned by the GST are accounted
for as a reduction to shareholders’ equity until used in
connection with the settlement of employee stock option
exercises, employee stock plan purchases or other awards. Each
period, the shares owned by the GST are valued at the closing
market price, with corresponding changes in the GST balance
reflected in additional paid-in capital. The issuance of shares
by the GST is accounted for by reducing the GST and additional
paid-in capital accounts proportionately as the shares are
released. The GST does not impact the determination or amount of
compensation expense for the benefit plans being settled. The
F-23
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
GST shares do not have any impact on the Company’s
earnings per share until they are used in connection with the
settlement of employee stock option exercises, employee stock
plan purchases or other awards.
The following table presents shares released from the GST for
the settlement of employee stock option exercises and employee
stock plan purchases for the years ended December 31, 2004,
2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Employee stock option exercises
|
|
|
1,109 |
|
|
|
1,041 |
|
|
|
197 |
|
|
Employee stock plan purchases
|
|
|
417 |
|
|
|
385 |
|
|
|
439 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total shares released from the GST
|
|
|
1,526 |
|
|
|
1,426 |
|
|
|
636 |
|
| |
|
|
|
|
|
|
|
|
|
The Company had the following two stock option plans under which
shares were available for grant at December 31, 2004, the
2001 Non-Employee Directors Stock Option Plan (the
“2001 Directors Plan”) and the 2004 Equity
Incentive Plan (the “2004 Plan”).
The 2004 Plan permits the granting of options or other
equity-based awards to the Company’s officers, employees
and consultants. Under the 2004 Plan, options may not be granted
at option prices that are less than fair market value at the
date of grant. The 2001 Directors Plan is a shareholder
approved plan. It provides for automatic grants of stock options
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 for
future grant and outstanding under each of the Company’s
plans as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Authorized | |
|
Available | |
|
Outstanding | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
1991 Stock Incentive Plan
|
|
|
10,000 |
|
|
|
— |
|
|
|
142 |
|
|
Promotion, Marketing and Endorsement Stock Incentive Plan
|
|
|
3,560 |
|
|
|
— |
|
|
|
673 |
|
|
1995 Employee Stock Incentive Plan
|
|
|
10,800 |
|
|
|
— |
|
|
|
6,175 |
|
|
1996 Stock Option Plan
|
|
|
9,000 |
|
|
|
— |
|
|
|
4,508 |
|
|
1998 Stock Incentive Plan
|
|
|
500 |
|
|
|
— |
|
|
|
117 |
|
|
2001 Directors Plan
|
|
|
500 |
|
|
|
318 |
|
|
|
182 |
|
|
2004 Plan
|
|
|
8,000 |
|
|
|
4,734 |
|
|
|
636 |
|
|
Non-Employee Directors Stock Option Plan
|
|
|
840 |
|
|
|
— |
|
|
|
136 |
|
|
Key Officer Plan
|
|
|
1,100 |
|
|
|
— |
|
|
|
100 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
44,300 |
|
|
|
5,052 |
|
|
|
12,669 |
|
| |
|
|
|
|
|
|
|
|
|
Under the Company’s stock option plans, outstanding options
generally vest over periods ranging from zero to five years from
the grant date and generally expire up to 12 years after
the grant date.
F-24
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The following summarizes stock option transactions for the years
ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands, except per share data) | |
|
Outstanding at beginning of year
|
|
|
13,238 |
|
|
$ |
19.04 |
|
|
|
14,936 |
|
|
$ |
20.19 |
|
|
|
14,753 |
|
|
$ |
20.57 |
|
|
Granted
|
|
|
2,875 |
|
|
$ |
13.89 |
|
|
|
1,820 |
|
|
$ |
12.73 |
|
|
|
2,458 |
|
|
$ |
16.46 |
|
|
Exercised
|
|
|
(1,132 |
) |
|
$ |
13.84 |
|
|
|
(1,174 |
) |
|
$ |
11.71 |
|
|
|
(1,077 |
) |
|
$ |
12.10 |
|
|
Canceled
|
|
|
(2,312 |
) |
|
$ |
22.21 |
|
|
|
(2,344 |
) |
|
$ |
25.18 |
|
|
|
(1,198 |
) |
|
$ |
24.45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
12,669 |
|
|
$ |
18.41 |
|
|
|
13,238 |
|
|
$ |
19.04 |
|
|
|
14,936 |
|
|
$ |
20.19 |
|
|
Options exercisable at end of year
|
|
|
9,154 |
|
|
$ |
19.57 |
|
|
|
9,922 |
|
|
$ |
20.56 |
|
|
|
11,522 |
|
|
$ |
21.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price range of outstanding options
|
|
|
|
|
|
$ |
5.25 - $40.00 |
|
|
|
|
|
|
$ |
5.25 - $40.00 |
|
|
|
|
|
|
$ |
5.00 - $40.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise price of all options granted during 2004, 2003 and
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, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Remaining | |
|
|
|
|
|
|
| Range of | |
|
Number | |
|
Contractual | |
|
Weighted-Average | |
|
Number | |
|
Weighted-Average | |
| Exercise Price | |
|
Outstanding | |
|
Life-Years | |
|
Exercise Price | |
|
Exercisable | |
|
Exercise Price | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| (in thousands) | |
|
(in thousands) | |
| |
$5.25 - $10 |
|
|
|
23 |
|
|
|
6.07 |
|
|
$ |
8.87 |
|
|
|
13 |
|
|
$ |
8.06 |
|
| |
$10 - $15 |
|
|
|
3,724 |
|
|
|
5.61 |
|
|
$ |
12.67 |
|
|
|
2,344 |
|
|
$ |
13.03 |
|
| |
$15 - $25 |
|
|
|
6,826 |
|
|
|
6.14 |
|
|
$ |
17.75 |
|
|
|
4,701 |
|
|
$ |
17.84 |
|
| |
$25 - $40 |
|
|
|
2,096 |
|
|
|
0.43 |
|
|
$ |
30.85 |
|
|
|
2,096 |
|
|
$ |
30.85 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
$5.25 - $40 |
|
|
|
12,669 |
|
|
|
5.66 |
|
|
$ |
18.41 |
|
|
|
9,154 |
|
|
$ |
19.57 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2002, the Company, at its discretion, extended the
expiration terms in severance arrangements and accelerated the
vesting of 683,000 options, held by certain terminated employees
and officers. At the time of the modifications, the exercise
prices of the options were in excess of the then-current market
price and accordingly these actions did not result in
compensation expense for the Company.
During 2004, the Company granted 1,052,500 shares of
Restricted Common Stock with fair values ranging from $10.45 to
$15.23 per share to certain employee and non-employee
participants under the Company’s 2004 Equity Incentive
Plan. The Company recorded $1,741,000 of compensation expense
related to these shares of Restricted Common Stock during 2004.
During 1998, the Company granted 130,000 shares of
Restricted Common Stock with a fair value of $31 per share
to 26 officers of the Company. Of these shares,
83,750 shares were canceled due to the service requirement
not being met. The remaining 26,250 shares, vested on
January 1, 2003. The net compensation expense of $814,000
related to the remaining shares was recognized ratably over the
vesting period, based on the difference between the exercise
price and market value of the stock on the measurement date. The
Company’s Restricted common stock generally vest over
periods ranging from one to five years.
F-25
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
|
Employee Stock Purchase Plan |
On May 25, 2004 the Company’s shareholders approved
the amendment and restatement of the Company’s 1999
Employee Stock Purchase Plan. The amended and restated plan was
renamed the Callaway Golf Company Employee Stock Purchase Plan
(the “ESPP” or the “Plan”) and authorized an
additional 4,000,000 shares for issuance under the Plan.
Additionally, the Plan was amended to shorten the look-back
period from two years to one year. Under the amended and
restated Plan participating employees authorize the Company to
withhold compensation and to use the withheld amounts to
purchase shares of the Company’s Common Stock at 85% of the
lower of the fair market value on the first day of a one year
offering period or the last day of each six month exercise
period. During 2004, 2003 and 2002, approximately 417,000,
385,000 and 439,000 shares, respectively, of the
Company’s Common Stock were purchased under the Employee
Stock Purchase Plan. As of December 31, 2004, there were
4,033,000 shares reserved for future issuance under the
Plan.
During 2004, 2003 and 2002, the Company recorded $1,741,000,
$15,000 and $314,000, respectively, in compensation expense for
Restricted Common Stock and certain options to purchase shares
of Common Stock granted to employees, officers, professional
endorsers and consultants of the Company. The valuation of
options granted to non-employees is estimated using the
Black-Scholes option-pricing model.
Unearned compensation has been charged for the value of
stock-based awards granted to both employees and non-employees
on the measurement date based on the valuation methods described
above. These amounts are amortized over the vesting period. The
unamortized portion of unearned compensation is shown as a
reduction of shareholders’ equity in the accompanying
consolidated balance sheet.
|
|
|
Shareholders’ Rights Plan |
The Company has a plan to protect shareholders’ rights in
the event of a proposed takeover of the Company. This plan is
not intended to prevent transactions which provide full and fair
value to shareholders. It is intended to discourage abusive
takeover tactics and to provide time for the Company’s
Board of Directors to review and evaluate what is in the best
interests of shareholders. Under the plan, each share of the
Company’s outstanding Common Stock carries one right to
purchase one one-thousandth 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 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 $0.01 per Right. The
shareholder rights plan, and related rights, are scheduled to
expire in June 2005.
|
|
| Note 11. |
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 25% of annual compensation, 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. Employees contributed
$9,065,000, $6,216,000 and $6,502,000 to the 401(k) Plan in
2004, 2003 and 2002, respectively. In accordance with the
provisions of the 401(k) Plan, the Company matched employee
contributions in the amount of $6,608,000, $4,695,000 and
$4,912,000 during 2004, 2003 and 2002, respectively.
Additionally, the Company can make discretionary contributions
based on the profitability of the Company. For the years ended
F-26
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
December 31, 2004, 2003 and 2002, compensation expense for
discretionary contributions was $0, $1,898,000 and $2,669,000,
respectively.
The Company also has an unfunded, non-qualified deferred
compensation plan. The plan allows officers, certain other
employees and directors 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. 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
$9,792,000 and $9,905,000 at December 31, 2004 and 2003,
respectively. The liability for the deferred compensation is
included in long-term liabilities and was $8,674,000 and
$8,947,000 at December 31, 2004, and 2003, respectively.
For the years ended December 31, 2004 and 2003, the total
participant deferrals were $3,482,000 and $1,544,000,
respectively.
The Company’s income (loss) before income tax provision was
subject to taxes in the following jurisdictions for the
following periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
United States
|
|
$ |
(34,182 |
) |
|
$ |
50,803 |
|
|
$ |
101,897 |
|
|
Foreign
|
|
|
10,469 |
|
|
|
17,080 |
|
|
|
9,774 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(23,713 |
) |
|
$ |
67,883 |
|
|
$ |
111,671 |
|
| |
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
(24,700 |
) |
|
$ |
21,452 |
|
|
$ |
26,666 |
|
| |
State
|
|
|
(270 |
) |
|
|
2,954 |
|
|
|
3,935 |
|
| |
Foreign
|
|
|
5,160 |
|
|
|
7,215 |
|
|
|
3,811 |
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
10,147 |
|
|
|
(8,323 |
) |
|
|
5,944 |
|
| |
State
|
|
|
(2,814 |
) |
|
|
120 |
|
|
|
1,367 |
|
| |
Foreign
|
|
|
(1,133 |
) |
|
|
(1,058 |
) |
|
|
502 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$ |
(13,610 |
) |
|
$ |
22,360 |
|
|
$ |
42,225 |
|
| |
|
|
|
|
|
|
|
|
|
During 2004, 2003 and 2002, tax benefits related to stock option
exercises were $2,161,000, $1,784,000 and $5,479,000,
respectively. Such benefits were recorded as a reduction of
income taxes payable and an increase in additional paid-in
capital.
F-27
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Deferred tax assets and liabilities are classified as current or
noncurrent according to the classification of the related asset
or liability. Significant components of the Company’s
deferred tax assets and liabilities as of December 31, 2004
and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Reserves and allowances
|
|
$ |
16,414 |
|
|
$ |
16,527 |
|
| |
Depreciation and amortization
|
|
|
— |
|
|
|
6,921 |
|
| |
Compensation and benefits
|
|
|
6,765 |
|
|
|
7,474 |
|
| |
Effect of inventory overhead adjustment
|
|
|
5,815 |
|
|
|
1,708 |
|
| |
Compensatory stock options and rights
|
|
|
941 |
|
|
|
1,328 |
|
| |
Revenue recognition
|
|
|
9,177 |
|
|
|
8,171 |
|
| |
Long-lived asset impairment
|
|
|
635 |
|
|
|
625 |
|
| |
Operating loss carryforward
|
|
|
3,305 |
|
|
|
— |
|
| |
Tax credit carryforwards
|
|
|
3,770 |
|
|
|
1,200 |
|
| |
Energy derivative
|
|
|
8,230 |
|
|
|
8,108 |
|
| |
Other
|
|
|
1,280 |
|
|
|
2,133 |
|
| |
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
56,332 |
|
|
|
54,195 |
|
|
Valuation allowance for deferred tax assets
|
|
|
(4,706 |
) |
|
|
(3,540 |
) |
| |
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
51,626 |
|
|
|
50,655 |
|
| |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
State taxes, net of federal income tax benefit
|
|
|
(3,374 |
) |
|
|
(1,659 |
) |
| |
Prepaid expenses
|
|
|
(2,405 |
) |
|
|
— |
|
| |
Depreciation and amortization
|
|
|
(3,051 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
42,796 |
|
|
$ |
48,996 |
|
| |
|
|
|
|
|
|
Of the total tax credit carryforwards of $3,770,000 at
December 31, 2004, the Company had state investment tax
credits of $2,450,000 which expire in 2012, foreign tax credit
carryforwards of $800,000 which expire in 2009, and research and
development credit carryforwards of $520,000 that generally do
not expire. The deferred tax asset of $3,305,000 related to net
operating loss carryforwards is set to expire in 2014 if
unutilized.
A valuation allowance has been established due to the
uncertainty of realizing certain tax carryforwards, and a
portion of other deferred tax assets. Of the $4,706,000
valuation allowance at December 31, 2004, $2,100,000 was
related to certain Top-Flite deferred tax assets existing at the
time of the acquisition. In the future, if we determine that the
realization of these Top-Flite deferred tax assets is more
likely than not, the reversal of the related valuation allowance
will reduce goodwill instead of provision for taxes. Based on
management’s assessment, it is more likely than not that
the net deferred tax assets will be realized through future
earnings.
F-28
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
A reconciliation of income taxes computed by applying the
statutory U.S. income tax rate to the Company’s income
before income taxes to the income tax provision is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Amounts computed at statutory U.S. tax rate
|
|
$ |
(8,300 |
) |
|
$ |
23,703 |
|
|
$ |
39,085 |
|
|
State income taxes, net of U.S. tax benefit
|
|
|
(1,466 |
) |
|
|
2,509 |
|
|
|
4,213 |
|
|
State tax credits, net of U.S. tax benefit
|
|
|
(1,171 |
) |
|
|
(1,138 |
) |
|
|
(429 |
) |
|
Expenses with no tax benefit
|
|
|
706 |
|
|
|
876 |
|
|
|
1,089 |
|
|
Foreign sales corporation tax benefits
|
|
|
— |
|
|
|
(4,277 |
) |
|
|
(1,060 |
) |
|
Change in deferred tax valuation allowance
|
|
|
1,166 |
|
|
|
1,086 |
|
|
|
(310 |
) |
|
Reversal of previously accrued income taxes
|
|
|
(4,382 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
Other
|
|
|
(163 |
) |
|
|
(396 |
) |
|
|
(357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$ |
(13,610 |
) |
|
$ |
22,360 |
|
|
$ |
42,225 |
|
| |
|
|
|
|
|
|
|
|
|
The Company’s U.S. and foreign tax returns are subject to
routine compliance reviews by the various tax authorities. The
Company accrues for tax contingencies based upon its best
estimate of the taxes expected to be paid. These estimates are
updated over time as more definitive information becomes
available from taxing authorities, completion of tax audits or
upon occurrence of other events. The tax contingency accrual is
recorded as a component of the Company’s net income taxes
payable/receivable balance.
In 2004, the tax rate benefited from net favorable adjustments
to previously estimated tax liabilities in the amount of
$4,382,000. The most significant favorable adjustments relate to
the resolution of state tax audits and various agreements
reached with the Internal Revenue Service (IRS) on certain
issues necessitating a reassessment of the Company’s tax
exposures for all open tax years.
In November 2004, the IRS completed its field examination of the
Company’s 1998 through 2000 tax returns and assessed
additional tax. The Company disagrees with certain of the
proposed adjustments and is in the process of contesting them at
the Appeals level of the IRS. There can be no assurance the
Company will be successful on appeal and the Company could
ultimately be required to pay the additional assessed tax.
However, in the opinion of the Company’s management, the
final disposition of these matters, and adjustments from other
taxing authorities, will not have a material adverse effect on
the consolidated financial position, liquidity or results of
operations of the Company.
As of December 31, 2004 the Company did not provide for
United States income taxes or foreign withholding taxes on a
cumulative total of $43,200,000 of undistributed earnings from
certain non-U.S. subsidiaries that will be permanently
reinvested outside the United States. Should the Company
repatriate foreign earnings, the Company would have to adjust
the income tax provision in the period management determined
that the Company would repatriate earnings. The Company is
currently studying the impact of the one-time favorable foreign
dividend provision enacted on October 22, 2004 as part of
the American Jobs Creation Act of 2004, and may decide to
repatriate earnings of some of its foreign subsidiaries. It is
expected that this evaluation will be completed before
June 30, 2005 and the effects of any decision cannot be
reasonably estimated at this time.
|
|
| Note 13. |
Commitments and Contingencies |
In conjunction with the Company’s program of enforcing its
proprietary rights, the Company has initiated or may initiate
actions against alleged infringers under the intellectual
property laws of various countries, including, for example, the
U.S. Lanham Act, the U.S. Patent Act and other
pertinent laws. Defendants in
F-29
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
these actions may, among other things, contest the validity
and/or the enforceability of some of the Company’s patents
and/or trademarks. Others may assert counterclaims against the
Company. Historically, these matters individually and in the
aggregate have not had a material adverse effect upon the
financial position or results of operations of the Company. It
is possible, however, that in the future one or more defenses or
claims asserted by defendants in one or more of those actions
may succeed, resulting in the loss of all or part of the rights
under one or more patents, loss of a trademark, a monetary award
against the Company or some other material loss to the Company.
One or more of these results could adversely affect the
Company’s overall ability to protect its product designs
and ultimately limit its future success in the marketplace.
In addition, the Company from time to time receives information
claiming that products sold by the Company infringe or may
infringe patent or other intellectual property rights of third
parties. It is possible that one or more claims of potential
infringement could lead to litigation, the need to obtain
licenses, the need to alter a product to avoid infringement, a
settlement or judgment, or some other action or material loss by
the Company.
In the fall of 1999 the Company adopted a unilateral sales
policy called the “New Product Introduction Policy”
(“NPIP”). The NPIP sets forth the terms on which the
Company chooses to do business with its customers with respect
to the introduction of new products. The NPIP has been the
subject of several legal challenges. Currently pending cases,
described below, include Lundsford v. Callaway Golf, Case
No. 2001-24-IV, pending in Tennessee state court
(“Lundsford I”); Foulston v. Callaway Golf, Case
No. 02C3607, pending in Kansas state court; Murray v.
Callaway Golf Sales Company, Case No. 3:04CV274-H, pending
in the United States District Court for the Western District of
North Carolina; and Lundsford v. Callaway Golf, Civil
Action No. 3:04-cv-442, pending in the United States
District Court for the Eastern District of Tennessee
(“Lundsford II”). An adverse resolution of the
NPIP cases could have a significant adverse effect upon the
Company’s results of operations, cash flows and financial
position.
Lundsford I was filed on April 6, 2001, and seeks to assert
a punitive class action by plaintiff on behalf of himself and on
behalf of consumers in Tennessee and Kansas who purchased select
Callaway Golf products covered by the NPIP on or after
March 30, 2000. Plaintiff asserts violations of Tennessee
and Kansas antitrust and consumer protection laws and is seeking
damages, restitution and punitive damages. The court has not
made any determination that the case may proceed in the form of
a class action. In light of the Lundsford II case
subsequently filed in the United States District Court,
described below, the parties have agreed to stay
Lundsford I, and to dismiss it without prejudice once the
federal court proceedings are underway.
In Foulston, filed on November 4, 2002, plaintiff seeks to
assert an alleged class action on behalf of Kansas consumers who
purchased Callaway Golf products covered by the NPIP and seeks
damages and restitution for the alleged class under Kansas law.
The trial court in Foulston stayed the case in light of
Lundsford I. The Foulston court has not made any determination
that the case may proceed in the form of a class action.
The complaint in Murray was filed on May 14, 2004, alleging
that a retail golf business was damaged by the alleged refusal
of Callaway Golf Sales Company to sell certain products after
the store violated the NPIP, and by the failure to permit
plaintiff to sell Callaway Golf products on the internet. The
proprietor seeks compensatory and punitive damages associated
with the failure of his retail operation. Callaway Golf removed
the case to the United States District Court for the Western
District of North Carolina, and has answered the complaint
denying liability. The parties are currently engaged in
discovery, and a trial date in December 2005 has been set by the
court.
Lundsford II was filed on September 28, 2004 in the
United States District Court for the Eastern District of
Tennessee. The complaint in Lundsford II asserts that the
NPIP constitutes an unlawful resale price agreement and an
attempt to monopolize golf club sales prohibited by federal
antitrust law. The complaint
F-30
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
also alleges a violation of the state antitrust laws of
Tennessee, Kansas, South Carolina and Oklahoma.
Lundsford II seeks to assert a nationwide class action
consisting of all persons who purchased Callaway Golf clubs
subject to the NPIP on or after March 30, 2000. Plaintiff
seeks treble damages under the federal antitrust laws,
compensatory damages under state law, and injunctive relief. The
Lundsford II court has not made a determination that the
case may proceed in the form of a class action. The parties are
engaged in discovery and motion practice.
On October 3, 2001, the Company filed suit in the United
States District Court for the District of Delaware, Civil Action
No. 01-669, against Dunlop Slazenger Group Americas, Inc.,
d/b/a Maxfli (“Maxfli”), for infringement of a golf
ball aerodynamics patent owned by the Company, U.S. Patent
No. 6,213,898 (the “Aerodynamics Patent”). The
Company later amended its complaint to add a claim that Maxfli
engaged in false advertising by claiming that its A10 golf balls
were the “longest ball on tour.” Maxfli answered the
complaint denying patent infringement and false advertising, and
also filed a counterclaim asserting that former Maxfli employees
hired by the Company had disclosed confidential Maxfli trade
secrets to the Company, and that the Company had used that
information to enter the golf ball business. In the
counterclaim, Maxfli sought compensatory damages of
$30.0 million; punitive damages equal to two times the
compensatory damages; prejudgment interest; attorneys’
fees; a declaratory judgment; and injunctive relief. On
November 12, 2003, pursuant to an agreement between the
Company and Maxfli, the court dismissed the Company’s claim
for infringement of the Aerodynamics Patent. On May 13,
2004, the Court granted the Company’s motion for summary
judgment, eliminating a portion of Maxfli’s counterclaim
and reducing Maxfli’s compensatory damages claim from
approximately $30.0 million to $18.5 million. The case
was tried to a jury beginning on August 2, 2004. On
August 12, 2004, the jury returned a verdict of
$2.2 million in favor of the Company based upon its finding
that Maxfli willfully engaged in false advertising. The jury
also rejected Maxfli’s counterclaim that the Company used
any Maxfli trade secrets. Maxfli filed post-trial motions
seeking to set aside the verdict and/or obtain a new trial. In
post-trial motions, Callaway Golf is seeking attorneys’
fees and prejudgment interest on its successful false
advertising claim, while Maxfli is seeking attorneys’ fees
on the dismissal of the patent infringement claims filed by
Callaway Golf. It is expected that if Maxfli is ultimately
unsuccessful with its post-trial motions, it will appeal the
verdict. If Maxfli is successful with its post-trial motions, or
an appeal of the verdict, and Maxfli’s counterclaims are
ultimately resolved in Maxfli’s favor, such matters could
have a significant adverse effect upon the Company’s
results of operations, cash flows and financial position.
On December 2, 2002, Callaway Golf Company was served with
a complaint filed in the Circuit Court of the 19th Judicial
District in and for Martin County, Florida, Case No. 935CA,
by the Perfect Putter Co. and its principals. Plaintiffs sued
Callaway Golf Company, Callaway Golf Sales Company and a
Callaway Golf Sales Company sales representative. Plaintiffs
alleged that the Company misappropriated certain alleged trade
secrets and proprietary information of the Perfect Putter Co.
and incorporated those purported trade secrets in the
Company’s Odyssey White Hot 2-Ball Putter. Plaintiffs also
allege that the Company made false statements and acted
inappropriately during discussions with plaintiffs. Plaintiffs
sought compensatory damages, exemplary damages, attorneys’
fees and costs, pre- and post-judgment interest and injunctive
relief. On December 20, 2002, the Company removed the case
to the United States District Court for the Southern District of
Florida, Case No. 02-14342. On April 29, 2003, the District
Court denied plaintiffs’ motion to remand the case to state
court. On January 7, 2005, the parties announced a
resolution and dismissal of the litigation with Callaway
Golf’s acquisition of putter patents from Perfect Putter.
Other terms of the resolution are confidential.
On December 14, 2004, Callaway Golf Sales Company was
served with a complaint captioned York v. Callaway Golf
Sales Company, filed in the Circuit Court for Dade County,
Florida, Case No. 04-25625 CA 11, asserting a
purported class action on behalf of all consumers who purchased
allegedly defective HX Red golf balls with cracked covers. The
complaint contains causes of action for strict liability, breach
of implied and express warranties, and violation of the
Magnuson-Moss Consumer Product Warranty Act.
F-31
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Plaintiff is seeking compensatory damages, attorneys’ fees
and prejudgment interest according to the proof to be presented.
On January 12, 2005, Callaway Golf removed the case to the
United States District Court for the Southern District of
Florida.
The Company and its subsidiaries, incident to their business
activities, are parties to a number of legal proceedings,
lawsuits and other claims, including the matters specifically
noted above. Such matters are subject to many uncertainties and
outcomes are not predictable with assurance. Consequently,
management is unable to estimate the ultimate aggregate amount
of monetary liability, amounts which may be covered by
insurance, or the financial impact with respect to these
matters. Except as discussed above with regard to the Maxfli
litigation and the NPIP cases, management believes at this time
that the final resolution of these matters, individually and in
the aggregate, will not have a material adverse effect upon the
Company’s consolidated annual results of operations, cash
flows or financial position.
|
|
|
Supply of Electricity and Energy Contracts |
In 2001, the Company entered into an agreement with Pilot Power
Group, Inc. (“Pilot Power”) as the Company’s
energy service provider and in connection therewith entered into
a long-term, fixed-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. The Enron Contract
provided, subject to the other terms and conditions of the
contract, for the Company to purchase nine megawatts of energy
per hour from June 1, 2001 through May 31, 2006
(394,416 megawatts over the term of the contract). The
total purchase price for such energy over the full contract term
would have been approximately $43,484,000.
At the time the Company entered into the Enron Contract, nine
megawatts per hour was in excess of the amount the Company
expected to be able to use in its operations. The Company agreed
to purchase this amount, however, in order to obtain a more
favorable price than the Company could have obtained if the
Company had purchased a lesser quantity. The Company expected to
be able to sell any excess supply through Pilot Power.
Because the Enron Contract provided for the Company to purchase
an amount of energy in excess of what it expected to be able to
use in its operations, the Company accounted for the Enron
Contract as a derivative instrument in accordance with SFAS
No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The Enron Contract did not qualify for
hedge accounting under SFAS No. 133. Therefore, the Company
recognized changes in the estimated fair value of the Enron
Contract currently in earnings. The estimated fair value of the
Enron Contract was based upon a present value determination of
the net differential between the contract price for electricity
and the estimated future market prices for electricity as
applied to the remaining amount of unpurchased electricity under
the Enron Contract. Through September 30, 2001, the Company
had recorded unrealized pre-tax losses of $19,922,000.
On November 29, 2001, the Company notified EESI that, among
other things, EESI was in default of the Enron Contract and that
based upon such default, and for other reasons, the Company was
terminating the Enron Contract effective immediately. At the
time of termination, the contract price for the remaining energy
to be purchased under the Enron Contract through May 2006 was
approximately $39,126,000.
On November 30, 2001, EESI notified the Company that it
disagreed that it was in default of the Enron Contract and that
it was prepared to deliver energy pursuant to the Enron
Contract. However, on December 2, 2001, EESI, along with
Enron Corporation and numerous other related entities, filed for
bankruptcy. Since November 30, 2001, the parties have not
been operating under the Enron Contract and Pilot Power has been
providing energy to the Company from alternate suppliers.
F-32
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
As a result of the Company’s notice of termination to EESI,
and certain other automatic termination provisions under the
Enron Contract, the Company believes that the Enron Contract has
been terminated. As a result, the Company adjusted the estimated
value of the Enron Contract through the date of termination, at
which time the terminated Enron Contract ceased to represent a
derivative instrument in accordance with SFAS No. 133.
Because the Enron Contract is terminated and neither party to
the contract is performing pursuant to the terms of the
contract, the Company no longer records future valuation
adjustments for changes in electricity rates. The Company
continues to reflect on its balance sheet the derivative
valuation account of $19,922,000, subject to periodic review, in
accordance with SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.”
The Company believes the Enron Contract has been terminated, and
as of March 1, 2005, EESI has not asserted any claim
against the Company. There can be no assurance, however, that
EESI or another party will not assert a future claim against the
Company or that a bankruptcy court or arbitrator will not
ultimately nullify the Company’s termination of the Enron
Contract. No provision has been made for contingencies or
obligations, if any, under the Enron Contract beyond
November 30, 2001.
The Company leases certain warehouse, distribution and office
facilities, vehicles as well as office equipment under operating
leases and certain computer and telecommunication equipment
under capital leases. Lease terms range from one to ten years
expiring at various dates through July 2014, with options to
renew at varying terms. Commitments for minimum lease payments
under non-cancelable operating leases as of December 31,
2004 are as follows:
| |
|
|
|
|
| |
|
(In thousands) | |
|
2005
|
|
$ |
6,209 |
|
|
2006
|
|
|
4,464 |
|
|
2007
|
|
|
3,945 |
|
|
2008
|
|
|
1,397 |
|
|
2009
|
|
|
671 |
|
|
Thereafter
|
|
|
938 |
|
| |
|
|
|
| |
|
$ |
17,624 |
|
| |
|
|
|
Future minimum lease payments have not been reduced by future
minimum sublease rentals of $765,000 under an operating lease.
Rent expense for the years ended December 31, 2004, 2003
and 2002 was $6,391,000 $4,388,000 and $3,780,000, respectively.
|
|
|
Unconditional Purchase Obligations |
During the normal course of its business, the Company enters
into agreements to purchase goods and services, including
purchase commitments for production materials, endorsement
agreements with professional golfers and other endorsers,
employment and consulting agreements, and intellectual property
licensing agreements pursuant to which the Company is required
to pay royalty fees. It is not possible to determine the amounts
the Company will ultimately be required to pay under these
agreements as they are subject to many variables including
performance-based bonuses, reductions in payment obligations if
designated minimum performance criteria are not achieved, and
severance arrangements. As of December 31, 2004, the
Company has entered into many of these contractual agreements
with terms ranging from one to seven years. The minimum
obligation that the Company is required to pay under these
agreements is $121,524,000 over the next seven years. In
addition, the Company also enters into unconditional purchase
obligations with various vendors and suppliers of goods and
services in the normal course of operations through purchase
orders or
F-33
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
other documentation or that are undocumented except for an
invoice. Such unconditional purchase obligations are generally
outstanding for periods less than a year and are settled by cash
payments upon delivery of goods and services and are not
reflected in this total. Future purchase commitments as of
December 31, 2004 are as follows:
| |
|
|
|
|
| |
|
(In thousands) | |
|
2005
|
|
|
38,357 |
|
|
2006
|
|
|
26,405 |
|
|
2007
|
|
|
20,045 |
|
|
2008
|
|
|
18,750 |
|
|
2009
|
|
|
15,750 |
|
|
Thereafter
|
|
|
2,217 |
|
| |
|
|
|
| |
|
$ |
121,524 |
|
| |
|
|
|
|
|
|
Other Contingent Contractual Obligations |
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
indemnities to the Company’s customers and licensees in
connection with the use, sale and/or license of Company
products, (ii) indemnities to various lessors in connection
with facility leases for certain claims arising from such
facilities or leases, (iii) indemnities to vendors and
service providers pertaining to claims based on the negligence
or willful misconduct of the Company and (iv) indemnities
involving the accuracy of representations and warranties in
certain contracts. In addition, the Company has made contractual
commitments to each of its officers and certain other employees
providing for severance payments upon the termination of
employment. The Company also has consulting agreements that
provide for payment of nominal fees upon the issuance of patents
and/or the commercialization of research results. The Company
has also issued a guarantee in the form of a standby letter of
credit as security for contingent liabilities under certain
workers’ compensation insurance policies. The duration of
these indemnities, commitments and guarantees varies, and in
certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees do not provide for any
limitation on the maximum amount of future payments the Company
could be obligated to make. Historically, costs incurred to
settle claims related to indemnities have not been material to
the Company’s financial position, results of operations or
cash flows. In addition, the Company believes the likelihood is
remote that material payments will be required under the
commitments and guarantees described above. The fair value of
indemnities, commitments and guarantees that the Company issued
during 2004 was not material to the Company’s financial
position, results of operations or cash flows.
The Company has entered into employment contracts with each of
the Company’s officers. These contracts generally provide
for severance benefits, including salary continuation, if
employment is terminated by the Company for convenience or by
the officer for substantial cause. In addition, in order to
assure that the officers would continue to provide independent
leadership consistent with the Company’s best interests in
the event of an actual or threatened change in control of the
Company, the contracts also generally provide for certain
protections in the event of such a change in control. These
protections include the extension of employment contracts and
the payment of certain severance benefits, including salary
continuation, upon the termination of employment following a
change in control. The Company is also generally obligated to
reimburse such officers for the amount of any excise taxes
associated with such benefits.
F-34
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| Note 14. |
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, Top-Flite and
Ben Hogan woods, irons, wedges and putters as well as Odyssey
putters and other golf-related accessories. The Golf Balls
segment consists primarily of Callaway Golf, Top-Flite and Ben
Hogan golf balls that are designed, manufactured and sold by the
Company. There are no significant intersegment transactions.
The table below contains information utilized by management to
evaluate its operating segments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Golf Clubs
|
|
$ |
703,227 |
|
|
$ |
735,654 |
|
|
$ |
727,196 |
|
| |
Golf Balls
|
|
|
231,337 |
|
|
|
78,378 |
|
|
|
66,023 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
934,564 |
|
|
$ |
814,032 |
|
|
$ |
793,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Golf
Clubs(1)
|
|
$ |
38,295 |
|
|
$ |
167,996 |
|
|
$ |
179,489 |
|
| |
Golf
Balls(2)
|
|
|
(8,911 |
) |
|
|
(52,687 |
) |
|
|
(25,576 |
) |
| |
Reconciling
items(3)
|
|
|
(53,097 |
) |
|
|
(47,426 |
) |
|
|
(42,242 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(23,713 |
) |
|
$ |
67,883 |
|
|
$ |
111,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
Identifiable
assets(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Golf Clubs
|
|
$ |
388,801 |
|
|
$ |
307,462 |
|
|
$ |
311,823 |
|
| |
Golf Balls
|
|
|
107,476 |
|
|
|
190,172 |
|
|
|
103,152 |
|
| |
Reconciling
items(4)
|
|
|
239,460 |
|
|
|
250,932 |
|
|
|
264,870 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
735,737 |
|
|
$ |
748,566 |
|
|
$ |
679,845 |
|
| |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Golf Clubs
|
|
$ |
30,468 |
|
|
$ |
20,216 |
|
|
$ |
18,202 |
|
| |
Golf Balls
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
30,468 |
|
|
$ |
20,216 |
|
|
$ |
18,202 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Golf Clubs
|
|
$ |
38,492 |
|
|
$ |
30,818 |
|
|
$ |
30,628 |
|
| |
Golf Balls
|
|
|
12,662 |
|
|
|
13,678 |
|
|
|
7,012 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
51,154 |
|
|
$ |
44,496 |
|
|
$ |
37,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
For 2002, the Company’s income before tax includes the
effect of the change in accounting estimate for the
Company’s warranty accrual. During the third quarter of
2002, the Company reduced its warranty reserve by approximately
$17,000,000 (Note 4). |
| |
| (2) |
The Company’s income (loss) before tax includes the
recognition of certain integration charges related to the
consolidation of its Callaway Golf and Top-Flite golf ball and
golf club manufacturing and research and development operations.
The Golf Clubs segment’s income before tax balance included
$1,987,000 and $0 of integration charges in 2004 and 2003,
respectively. The Golf Ball segment’s loss before income
tax balance included $14,157,000 and $24,080,000 of integration
charges in 2004 and 2003, respectively. |
F-35
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| (3) |
Represents corporate general and administrative expenses and
other income (expense) not utilized by management in
determining segment profitability. |
| |
| (4) |
Identifiable assets are comprised of net inventory, certain
property, plant and equipment, intangible assets and goodwill.
Reconciling items represent unallocated corporate assets not
segregated between the two segments. |
The Company’s net sales by product category are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Drivers and Fairway Woods
|
|
$ |
238,555 |
|
|
$ |
252,420 |
|
|
$ |
309,972 |
|
| |
Irons*
|
|
|
259,058 |
|
|
|
280,758 |
|
|
|
252,116 |
|
| |
Putters
|
|
|
100,482 |
|
|
|
142,814 |
|
|
|
111,523 |
|
| |
Golf Balls
|
|
|
231,337 |
|
|
|
78,378 |
|
|
|
66,023 |
|
| |
Accessories and
Other*
|
|
|
105,132 |
|
|
|
59,662 |
|
|
|
53,585 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
934,564 |
|
|
$ |
814,032 |
|
|
$ |
793,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| * |
Beginning with the year ended December 31, 2004, the
Company includes wedge sales within the iron sales product
category. Previously, wedge sales were included as a component
of the accessories and other category. Prior periods have been
reclassified to conform with the current period presentation. |
The Company markets its products in the United States and
internationally, with its principal international markets being
Japan and Europe. The tables below contain information about the
geographical areas in which the Company operates. Revenues are
attributed to the location to which the product was shipped.
Long-lived assets are based on location of domicile.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Long-Lived | |
| |
|
Sales | |
|
Assets | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
546,219 |
|
|
$ |
286,089 |
|
|
Europe
|
|
|
169,519 |
|
|
|
10,481 |
|
|
Japan
|
|
|
70,536 |
|
|
|
3,176 |
|
|
Rest of Asia
|
|
|
51,662 |
|
|
|
4,412 |
|
|
Other foreign countries
|
|
|
96,628 |
|
|
|
11,343 |
|
| |
|
|
|
|
|
|
| |
|
$ |
934,564 |
|
|
$ |
315,501 |
|
| |
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
449,424 |
|
|
$ |
305,176 |
|
|
Europe
|
|
|
145,148 |
|
|
|
16,995 |
|
|
Japan
|
|
|
101,259 |
|
|
|
3,590 |
|
|
Rest of Asia
|
|
|
58,327 |
|
|
|
846 |
|
|
Other foreign countries
|
|
|
59,874 |
|
|
|
8,007 |
|
| |
|
|
|
|
|
|
| |
|
$ |
814,032 |
|
|
$ |
334,614 |
|
| |
|
|
|
|
|
|
F-36
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Long-Lived | |
| |
|
Sales | |
|
Assets | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
2002
|
|
|
|
|
|
|
|
|
|
United
States*
|
|
$ |
439,847 |
|
|
$ |
263,706 |
|
|
Europe
|
|
|
136,941 |
|
|
|
16,477 |
|
|
Japan
|
|
|
102,624 |
|
|
|
3,791 |
|
|
Rest of Asia
|
|
|
58,040 |
|
|
|
1,000 |
|
|
Other foreign countries
|
|
|
55,767 |
|
|
|
3,683 |
|
| |
|
|
|
|
|
|
| |
|
$ |
793,219 |
|
|
$ |
288,657 |
|
| |
|
|
|
|
|
|
|
|
| * |
Beginning with the first quarter of 2003, the Company records
royalty revenue in net sales. Previously, royalty revenue was
recorded as a component of other income and prior periods have
been reclassified to conform with the current period
presentation. |
Note 15. Licensing
Arrangements
The Company from time to time licenses its trademarks and
service marks to third parties for use on products such as golf
apparel, golf shoes, watches, luggage and other golf related
products, such as headwear, travel bags, golf towels and golf
umbrellas. The Company has a current licensing arrangement with
Ashworth, Inc. for a complete line of Callaway Golf men’s
and women’s apparel for distribution in the United States,
Canada, Europe, Australia, New Zealand and South Africa. The
first full year in which the Company received royalty revenue
under these licensing arrangements was 2003. The Company also
has a current licensing arrangement with Sanei International
Co., Ltd. (“Sanei”) for a complete line of Callaway
Golf men’s and women’s apparel for distribution in
Asian Pacific markets including Japan, Korea, Hong Kong, Taiwan,
Singapore, Indonesia, Malaysia, Thailand, Vietnam, Philippines,
Brunei, Myanmar and China.
In addition to apparel, the Company has also entered into
licensing arrangements with (i) Tour Golf Group, Inc. for a
Callaway Golf footwear collection, (ii) Fossil, Inc. for a
line of Callaway Golf watches and clocks and (iii) TRG
Accessories, LLC for a collection consisting of luggage,
personal leather products and skin protection products. The
Company assumed certain license agreements Top-Flite had
previously entered into with third parties to license the use of
its Top-Flite, Ben Hogan and Strata brands on apparel, souvenirs
and gifts. In 2004, the Company entered into licensing
arrangements with Global Wireless Entertainment, Inc. for the
creation of golf-related software and applications for wireless
handheld devices and platforms.
|
|
| Note 16. |
Transactions with Related Parties |
The Callaway Golf Company Foundation (the
“Foundation”) oversees and administers charitable
giving for the Company and makes grants to carefully selected
organizations. Officers of the Company also serve as directors
of the Foundation and the Company’s employees provide
accounting and administrative services for the Foundation. In
2004, 2003 and 2002, the Company recognized charitable
contribution expense of $920,000, $939,000 and $1,165,000,
respectively, as a result of its unconditional promise to
contribute such amounts to the Foundation.
In connection with the terms of the Company’s former chief
executive officer’s separation from the Company, the
Company purchased his primary residence at a cost of $1,715,000.
The purchase price was determined based upon two independent
appraisals. As of March 2005, the Company was marketing the home
and accounted for the home as a long-lived asset held for sale
classified as other assets.
In the latter part of 2003, the Company requested on short
notice that one of its executive officers relocate to Chicopee,
Massachusetts to be the President and Chief Operating Officer of
the newly acquired Top-Flite business. In order to assist this
officer with his relocation across country on such short notice
(and because under the Sarbanes-Oxley Act of 2002 the Company is
prohibited from making a loan to him), the
F-37
CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Company purchased his residence in California at a cost of
$2,000,000. The purchase price was determined based upon two
independent appraisals. As of December 31, 2003, the
Company was marketing the home and accounted for the home as a
long-lived asset held for sale classified as other assets. In
2004, this residence was sold and the Company recorded a net
loss of $27,000.
|
|
| Note 17. |
Summarized Quarterly Data (Unaudited) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year 2004 Quarters | |
| |
|
| |
| |
|
1st | |
|
2nd(2) | |
|
3rd | |
|
4th | |
|
Total(3) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net sales
|
|
$ |
363,786 |
|
|
$ |
297,908 |
|
|
$ |
128,457 |
|
|
$ |
144,413 |
|
|
$ |
934,564 |
|
|
Gross profit
|
|
$ |
166,191 |
|
|
$ |
127,836 |
|
|
$ |
26,071 |
|
|
$ |
38,724 |
|
|
$ |
358,822 |
|
|
Net income (loss)
|
|
$ |
40,545 |
|
|
$ |
13,715 |
|
|
$ |
(35,895 |
) |
|
$ |
(28,468 |
) |
|
$ |
(10,103 |
) |
|
Earnings (loss) per common
share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.60 |
|
|
$ |
0.20 |
|
|
$ |
(0.53 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.15 |
) |
| |
Diluted
|
|
$ |
0.59 |
|
|
$ |
0.20 |
|
|
$ |
(0.53 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.15 |
) |
| |
|
|
|
Fiscal Year 2003 Quarters |
| |
|
|
|
|
|
|
1st |
|
|
|
2nd |
|
|
|
3rd |
|
|
|
4th |
|
|
|
Total(4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net sales
|
|
$ |
271,719 |
|
|
$ |
242,077 |
|
|
$ |
153,634 |
|
|
$ |
146,602 |
|
|
$ |
814,032 |
|
|
Gross profit
|
|
$ |
137,837 |
|
|
$ |
126,494 |
|
|
$ |
70,220 |
|
|
$ |
34,064 |
|
|
$ |
368,615 |
|
|
Net income (loss)
|
|
$ |
42,477 |
|
|
$ |
34,143 |
|
|
$ |
2,334 |
|
|
$ |
(33,431 |
) |
|
$ |
45,523 |
|
|
Earnings (loss) per common
share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.65 |
|
|
$ |
0.52 |
|
|
$ |
0.04 |
|
|
$ |
(0.50 |
) |
|
$ |
0.69 |
|
| |
Diluted
|
|
$ |
0.64 |
|
|
$ |
0.52 |
|
|
$ |
0.03 |
|
|
$ |
(0.50 |
) |
|
$ |
0.68 |
|
|
|
| (1) |
Earnings per share is computed individually for each of the
quarters presented; therefore, the sum of the quarterly earnings
per share may not necessarily equal the total for the year. |
| |
| (2) |
On May 28, 2004, the Company acquired all of the issued and
outstanding shares of stock of FrogTrader, Inc. Thus, the
Company’s financial data includes the FrogTrader, Inc.
results of operations from May 28, 2004. |
| |
| (3) |
During 2004, the Company’s gross profit, net income and
earnings per common share include the recognition of certain
integration charges related to the consolidation of its Callaway
Golf and Top-Flite golf ball and golf club manufacturing and
research and development operations. These charges reduced the
Company’s gross profit, net income and earnings per common
share by approximately $15,689,000, $17,470,000 and $0.26,
respectively, for the year ended December 31, 2004 (see
Note 3). |
| |
| (4) |
On September 15, 2003 the Company completed the domestic
portion of the Top-Flite Acquisition. The settlement of the
international assets was effective October 1, 2003. Thus,
the Company’s consolidated statement of operations include
The Top-Flite Golf Company results of operations in the United
States beginning September 15, 2003 forward and the
international operations beginning October 1, 2003 forward.
Additionally, the Company’s 2003 gross profit, net income
and earnings per common share include the recognition of
integration charges related to the consolidation of its Callaway
Golf and Top-Flite golf ball and golf club operations. These
charges reduced the Company’s gross profit, net income and
earnings per common share by approximately $24,080,000,
$16,147,000 and $0.24, respectively, for the year ended
December 31, 2003 (Note 3). |
F-38
SCHEDULE II
CALLAWAY GOLF COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Valuation | |
| |
|
Allowance | |
|
Reserve | |
|
Allowance | |
| |
|
for | |
|
for | |
|
For | |
| |
|
Doubtful | |
|
Obsolete | |
|
Deferred | |
| Date |
|
Accounts | |
|
Inventory | |
|
Tax Assets | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balance, December 31, 2001
|
|
$ |
5,157 |
|
|
$ |
7,136 |
|
|
$ |
2,764 |
|
| |
Provision
|
|
|
1,124 |
|
|
|
12,871 |
|
|
|
— |
|
| |
Write-off, disposals, costs and other, net
|
|
|
(807 |
) |
|
|
(3,246 |
) |
|
|
(310 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
5,474 |
|
|
|
16,761 |
|
|
|
2,454 |
|
| |
Provision
|
|
|
2,047 |
|
|
|
7,629 |
|
|
|
1,189 |
|
| |
Write-off, disposals, costs and other, net
|
|
|
(1,329 |
) |
|
|
(5,784 |
) |
|
|
(103 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
6,192 |
|
|
|
18,606 |
|
|
|
3,540 |
|
| |
Provision
|
|
|
1,291 |
|
|
|
3,900 |
|
|
|
1,312 |
|
| |
Write-off, disposals, costs and other, net
|
|
|
(113 |
) |
|
|
(8,905 |
) |
|
|
(146 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
7,370 |
|
|
$ |
13,601 |
|
|
$ |
4,706 |
|
| |
|
|
|
|
|
|
|
|
|
S-1
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
| |
|
|
| |
10.1 |
3 |
|
First Amendment to First Amended Officer Employment Agreement,
effective as of October 6, 2003, between the Company and
John F. Melican. |
| |
10.1 |
4 |
|
First Amended Officer Employment Agreement, effective as of
March 1, 2003, between the Company and John F. Melican. |
| |
10.2 |
3 |
|
Callaway Golf Company Executive Deferred Compensation Plan, as
amended and restated, effective May 6, 2002. |
| |
10.2 |
4 |
|
Trust Agreement for the Callaway Golf Company Executive Deferred
Compensation Plan, entered into as of May 6, 2002, between
the Company and U.S. Trust Company, N.A. |
| |
10.2 |
5 |
|
Form of Notice of Grant of Stock Option and Option Agreement for
Non-Employee Directors. |
| |
10.2 |
8 |
|
Form of Notice of Grant of Stock Option and Option Agreement for
Officers. |
| |
10.3 |
4 |
|
Indemnification Agreement, dated April 7, 2004, between the
Company and Anthony S. Thornley. |
| |
10.5 |
0 |
|
Amendment No. 2 to Trust Agreement, effective as of
October 21, 2004, by the Company with the consent of
Arrowhead Trust Incorporated. |
| |
21.1 |
|
|
List of Subsidiaries. |
| |
23.1 |
|
|
Consent of Deloitte & Touche LLP. |
| |
24.1 |
|
|
Form of Power of Attorney. |
| |
31.1 |
|
|
Certification of William C. Baker pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 |
|
|
Certification of Bradley J. Holiday pursuant to
Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 |
|
|
Certification of William C. Baker and Bradley J.
Holiday pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |