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CALLAWAY GOLF COMPANY
2005 ANNUAL REPORT
CALLAWAY GOLF COMPANY 2005 ANNUAL REPORT

Table of contents

  • Page 1
    CALLAWAY GOLF COMPANY 2005 ANNUAL REPORT C A L L AWAY G OL F C O M PA N Y 2005 ANNUAL REPORT

  • Page 2

  • Page 3
    "This is the essence of Callaway Golf - sound, vibrant and energized - the visible difference reflected in our products and our people." ïš¼ GEORGE FELLOWS President and CEO

  • Page 4
    ...Best in Class Drivers. Closer inspection reveals the faces of Callaway Golf embedded in the product images, photos of many of the more than 3,000 people who work every day at the making, the marketing and the selling of every golf club or golf ball bearing the names of the Callaway brands. Some of...

  • Page 5
    ... as our Fusion Fairway woods. Anchoring our domnant 2005 iron line were the X-18, Big Bertha Fusion and X-Tour Irons, all enjoying positive reception THE FUSION ® FT3™ DRIVER Winner of 5 of 8 - 2005 PGA and LPGA Majors Brilliant salesmanship and marketing genius were two business traits...

  • Page 6
    ... in our supply and assembly operations that could further improve performance. We believe Superior products are, and always substantial cost savings can be achieved by reexamining our manufacturing have been, a hallmark of Callaway Golf Company. Still, we recognize that great products alone...

  • Page 7
    ... marketing programs to make them more consumer-focused than ever. We already reach more than 800,000 of our consumers each quarter in our award-winning Callaway Golf Magazine and have become much more aggressive in getting our message out to the marketplace through both advertising and direct...

  • Page 8
    ...SRI International senior management Steven C. McCracken Senior Executive Vice President, Chief Administrative Officer and Secretary William C. Baker California Pizza Kitchen, Inc. Public Storage, Inc. and Javo Beverage Company Bradley J. Holiday Senior Executive Vice President and Chief Financial...

  • Page 9
    ...LLP 695 Town Center Drive, Suite 1200 Costa Mesa, CA 92626 Transfer Agent and Registrar Patrick S. Burke Callaway Golf Company 2180 Rutherford Road Carlsbad, CA 92008-7328 760.931.1771 [email protected] for more information visit the company's websites: Mellon Investor Services LLC 480...

  • Page 10
    ... 31, 2005. Forward - Looking Information Statements made in the letter to shareholders that relate to future plans, events, financial results or performance including statements relating to future growth, profitability, shareholder value, market share/position and product launches, as well as...

  • Page 11

  • Page 12

  • Page 13
    ...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: Title of each class Name of each exchange on which registered Common Stock, $.01 par value per share New York Stock Exchange...

  • Page 14
    ...-Edge CFT-Ely Would-ERC-Explosive Distance.Amazing Soft Feel-Flying Lady-FT-3- FTX-Fusion-Game Enjoyment System-Game Series-Gems-GES-Ginty-Great Big Bertha-Hawk Eye- Heavenwood-Hogan-Hybrid 45-HX-I-Trax-Legacy-Legend-Little Ben-Little Bertha-Long & Soft- Molitor-Number One Putter in Golf-Odyssey-ORG...

  • Page 15
    ... in and Disagreements with Accountants on Accounting and Financial Disclosure ...Other Information ...PART III. Directors and Executive Officers of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...Certain...

  • Page 16
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 17
    ..., manufactures and sells high quality golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as footwear, golf bags, golf gloves, golf headwear, golf towels and golf umbrellas. The Company generally sells its products to...

  • Page 18
    ...product group are described below: Drivers and Fairway Woods. This product category includes sales of the Company's drivers, fairway woods and hybrid products, which are sold under the Callaway Golf, Ben Hogan and Top-Flite brands. These products are generally made of metal (either titanium or steel...

  • Page 19
    ... umbrellas as well as sales of pre-owned products through Callaway Golf Interactive, Inc., which was acquired in May 2004. Additionally, this product category includes royalties from licensing of the Company's trademarks and service marks on products such as golf apparel, footwear, watches, travel...

  • Page 20
    ... the consolidation of the Callaway Golf, Top-Flite, Ben Hogan and Odyssey selling functions. Sales of the Company's products in the United States are made and supported by fulltime regional field representatives and in-house sales and customer service representatives who are employees of the Company...

  • Page 21
    ... opportunity to trade in their used Callaway Golf clubs 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. Advertising and Promotion Within the United States...

  • Page 22
    ... the number two position on the PGA tour in 2005. In addition, the Company's golf ball products remained number two in U.S. dollar market share in 2005. For both golf clubs and golf balls, the Company generally competes on the basis of technology, quality, performance, customer service and price. In...

  • Page 23
    ... in the United States, Canada, Europe, Australia, New Zealand and South Africa. 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 Japan, Korea, China and other...

  • Page 24
    ... 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...

  • Page 25
    ... "International Risks"). Competition 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. New product introductions, price reductions, consignment sales, extended payment terms, "closeouts...

  • Page 26
    ... 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...

  • Page 27
    ... 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. Growth Opportunities In order for the Company to significantly grow its sales of golf clubs or golf balls, the Company must...

  • Page 28
    ...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. Conformance with the Rules of Golf New golf club and golf ball products generally seek...

  • Page 29
    ... 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...

  • Page 30
    ... customers and consumers. Product Returns 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...

  • Page 31
    ... 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...

  • Page 32
    ... consider these changes in accounting rules, the price at which the Company's stock is traded could be significantly adversely affected. 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...

  • Page 33
    ... 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, the United Kingdom and China. The Company...

  • Page 34
    ...case no. C.A. 06-91, asserting claims against Acushnet Company for patent infringement. Specifically, Callaway Golf asserts that Acushnet's sale of the Titleist Pro V1 family of golf balls infringes four golf ball patents that Callaway Golf acquired when it acquired the assets of Top-Flite. Callaway...

  • Page 35
    ... the New York Stock Exchange Listed Company Advisory Committee. Mr. Fellows graduated in 1964 with a B.S. degree from City College of New York, received an MBA from Columbia University in 1966 and completed the Harvard Advanced Management Program in 1981. Steven C. McCracken is Senior Executive Vice...

  • Page 36
    ... 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...

  • Page 37
    ... 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 January 31, 2006, the approximate number...

  • Page 38
    ... 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...

  • Page 39
    ... Financial Statements). (2) During 2005, 2004 and 2003, 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...

  • Page 40
    ... used in the preparation of its consolidated financial statements: Revenue Recognition Sales are recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," as products are shipped to customers, net of an allowance for sales returns and sales...

  • Page 41
    ... 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 claims significantly exceeds the estimated warranty reserve, the Company's cost of sales, gross profit and net income would be significantly adversely...

  • Page 42
    ... 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...

  • Page 43
    ... full consolidation of the Callaway golf ball manufacturing with the Top-Flite golf ball manufacturing at the Chicopee, Massachusetts and Gloversville, New York locations. During December 2005, 2004 and 2003, in connection with the consolidation, the Company incurred charges to pre-tax earnings of...

  • Page 44
    ... of the Company's products launched during 2005. Net sales information by product category is summarized as follows: Year Ended December 31, 2005 Growth (Decline) 2004 Dollars Percent (In millions) Net Sales: Driver and fairway woods ...Irons ...Putters ...Golf balls ...Accessories and other...

  • Page 45
    ... of the Odyssey White Steel and Dual Force 2 putters and the Callaway Golf I-Trax Putter partially offset by decreased sales of the Company's older putter models which were in the second and third years of their product life cycles. The $16.6 million (7%) decrease in net sales of golf balls to $214...

  • Page 46
    ...changes in foreign exchange rates partially offset by a decline in average selling prices of some of the Company's driver and fairway woods products. The increase in gross profit was partially offset by charges of $6.4 million related to the Top-Flite Integration and $2.1 million related to the 2005...

  • Page 47
    ... Risk" contained in Item 1A. 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 ...Irons* ...Putters ...Golf balls ...Accessories and other* ... $238.6 259.1 100...

  • Page 48
    ... 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 footwear, travel bags and other accessories. Net sales information by region...

  • Page 49
    ... 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...

  • Page 50
    ... line of credit in the amount of $13.0 million. These increases were partially offset by the issuance of $14.8 million of Common Stock under employee benefit plans during the year. The Company's net accounts receivable decreased $7.1 million to $98.1 million at December 31, 2005 from $105.2 million...

  • Page 51
    ... 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. The new stock repurchase program supersedes the...

  • Page 52
    ... 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...

  • Page 53
    ... for hedging purposes to limit its exposure to changes in foreign currency exchange rates. Transactions involving these financial instruments are with creditworthy firms. The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain...

  • Page 54
    ... 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...

  • Page 55
    ..., management believes that, as of December 31, 2005, the Company's internal control over financial reporting is effective based on those criteria. Changes in Internal Control Over Financial Reporting. As previously reported, the Callaway Golf business information systems and the acquired Top-Flite...

  • Page 56
    ...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, 2005 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its...

  • Page 57
    ... 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...

  • Page 58
    ... 120 days after the end of fiscal year 2005 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...

  • Page 59
    ... 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...

  • Page 60
    ...May 7, 2003 (file no. 1-10962). 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...

  • Page 61
    ... definitive Proxy Statement on Schedule 14A filed with the Commission on March 27, 2000 (file no. 1-10962). 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...

  • Page 62
    ... to the Company's Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Commission on March 10, 2005 (file no. 1-10962). Trust Agreement for the Callaway Golf Company Executive Deferred Compensation Plans.†Callaway Golf Company Employee Stock Purchase Plan (as Amended...

  • Page 63
    ...'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). 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...

  • Page 64
    ... 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). Trust Agreement, dated July 14, 1995, between the Company and Sanwa Bank California, as Trustee, for the benefit of participating employees, incorporated...

  • Page 65
    ...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. CALLAWAY GOLF COMPANY By: /S/ GEORGE FELLOWS George Fellows President and Chief Executive Officer Date: February 23, 2006...

  • Page 66
    ... registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer...

  • Page 67
    ... information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ BRADLEY J. HOLIDAY Bradley J. Holiday Senior Executive Vice President and Chief Financial Officer...

  • Page 68
    ... officers of Callaway Golf Company, a Delaware corporation (the "Company"), does hereby certify with respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission (the "10-K Report"), that: (1) the 10-K Report...

  • Page 69
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2005 and 2004 ...Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 ...Consolidated Statements of Cash Flows ...

  • Page 70
    ... 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, 2005, based...

  • Page 71
    ... ...Property, plant and equipment, net ...Intangible assets, net ...Goodwill ...Deferred taxes ...Other assets ...LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ...Accrued employee compensation and benefits ...Accrued warranty expense ...Bank line of...

  • Page 72
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2005 2004 2003 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 73
    ... sale of capital assets ...Acquisitions, net of cash acquired ...Proceeds from sale of marketable securities ...Net cash used in investing activities ...Cash flows from financing activities: Issuance of Common Stock ...Acquisition of Treasury Stock ...Proceeds from (payments on) Line of Credit, net...

  • Page 74
    ... of stock options ...Tax benefit from exercise of stock options ...Issuance of Restricted Common Stock ...Acquisition of Treasury Stock ...Compensatory stock and stock options ...Employee stock purchase plan ...Cash dividends ...Adjustment of Grantor Stock Trust shares to market value ...Equity...

  • Page 75
    ..., manufactures and sells high quality golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as footwear, golf bags, golf gloves, golf headwear, golf towels and golf umbrellas. The Company generally sells its products to...

  • Page 76
    ... 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...

  • Page 77
    ... the Employee Stock Purchase Plan and Restricted Stock grants to employees and non-employees (see 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...

  • Page 78
    ... 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...

  • Page 79
    ... 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...

  • Page 80
    ... years. The fair value of employee stock options was estimated at the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The pro forma expense includes the fair value of the Company's shares issued under its Employee Stock Purchase Plan using...

  • Page 81
    ...-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, 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...

  • Page 82
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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 ...

  • Page 83
    ... 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...

  • Page 84
    ... include, among other things, the integration of the Callaway Golf, Odyssey, Top-Flite and Ben Hogan selling functions, the complete consolidation of all golf ball manufacturing at the Top-Flite locations in Massachusetts and New York, and the elimination or reduction of other operating expenses...

  • Page 85
    ... 3,437 In October 2005, the Company completed its full consolidation of the Callaway Golf ball manufacturing with the Top-Flite golf ball manufacturing at the Chicopee, Massachusetts and Gloversville, New York locations. During December 2005, 2004 and 2003, in connection with the consolidation, the...

  • Page 86
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 5. Selected Financial Statement Information December 31, 2005 2004 (In thousands) Accounts receivable, net: Trade accounts receivable ...Allowance for doubtful accounts ...Inventories, net: Raw materials ...Work-in-...

  • Page 87
    ... annual impairment test. The following sets forth the intangible assets by major asset class: Useful Life (Years) December 31, 2005 Accumulated Net Book Gross Amortization Value (In thousands) December 31, 2004 Accumulated Net Book Gross Amortization Value (In thousands) Non-Amortizing: Trade name...

  • Page 88
    ... Second Amendment. 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...

  • Page 89
    ... notional amounts of the Company's foreign exchange contracts were approximately $35,624,000, $52,736,000 and $91,222,000, 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...

  • Page 90
    ... 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...

  • Page 91
    ...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...

  • Page 92
    ... 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 thereafter annually if the director will be serving for at least another year. All such grants are made at prices based on the market value of the stock...

  • Page 93
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The exercise price of all options granted during 2005, 2004 and 2003 was equal to the market value on the date of grant. The following table summarizes additional information about outstanding stock options at December 31, ...

  • Page 94
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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...

  • Page 95
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The provision (benefit) for income taxes is as follows (in thousands): Year Ended December 31, 2005 2004 2003 Current tax provision (benefit): Federal ...State ...Foreign ...Deferred tax expense (benefit): Federal ...State...

  • Page 96
    ... estimates are updated over time as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events. In 2005, the tax rate benefited from net favorable adjustments to previously estimated tax...

  • Page 97
    ... Policy ("NPIP"). The NPIP sets forth the basis 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...

  • Page 98
    ... 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...

  • Page 99
    ... contract, the Company no longer records 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...

  • Page 100
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Lease Commitments 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 ...

  • Page 101
    ..., hybrids, irons, wedges and putters as well as Odyssey putters, other golf-related accessories and royalties from licensing of the Company's trademarks and service marks. The Golf Balls segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan golf balls that are designed, manufactured...

  • Page 102
    ...(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 selling, manufacturing and research and development operations. The Golf Clubs segment's income before tax included $2,485,000, $2,782,000...

  • Page 103
    CALLAWAY GOLF COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The Company's net sales by product category are as follows: Year Ended December 31, 2005 2004 2003 (In thousands) Net sales Drivers and Fairway Woods ...Irons(*) ...Putters ...Golf Balls ...Accessories and Other(*) ... $...

  • Page 104
    ...-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...

  • Page 105
    ... 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. In connection with these integration charges, the Company's gross profit, net income and earnings per common...

  • Page 106
    ...CALLAWAY GOLF COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2005, 2004 and 2003 Allowance Reserve for for Doubtful Obsolete Accounts Inventory (Dollars in thousands) Date Balance, December 31, 2002 ...Provision ...Write-off, disposals, costs and other, net...

  • Page 107
    Photo Mosaic: XYZ graphics Printing: RR Donnelley Art Direction/Design: Jeff Adamoff | Callaway Golf

  • Page 108