Callaway 2005 Annual Report Download - page 49

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 15 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 15 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 previously reported litigation with Dunlop Slazenger Group Americas, Inc. (d/b/a Maxfli) (which
litigation has been resolved) 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.
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 15 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
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