Callaway 2007 Annual Report Download

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CALLAWAY GOLF COMPANY 2007 ANNUAL REPORT

Table of contents

  • Page 1
    CALLAWAY GOLF COMPANY 2007 ANNUAL REPORT

  • Page 2
    ... what drive us to continue developing TECHNOLOGY that fuels the most advanced equipment in the game. The original Big Bertha Driver launched a revolution in PERFORMANCE, and it carries on today with products like the FT-i Drivers and the Tour i Series Golf Balls. After a very successful 2007, the...

  • Page 3

  • Page 4
    ... employees played an integral part in building the momentum we forged in 2007. Many elements came together for the Company to have such a banner year, most notably the enthusiastic acceptance of our extensive product line by golfers worldwide. Our Woods business, driven by patented Fusion Technology...

  • Page 5
    ... compared to 2007, further validating our excitement about this new product. In fact, four of the six players occupying the top 3 spots in the men's and women's World Golf Rankings play Callaway Golf balls. Obviously, no other manufacturer can make that claim. The professional tours provide us...

  • Page 6
    ... with Callaway Golf" is one of The Golf Channel's most popular programs. In late 2007, we established ourselves as an industry leader in cause-related marketing. The Callaway Golf Foundation joined forces with the Entertainment Industry Foundation, one of North America's pre-eminent fundraising...

  • Page 7
    ... a new line of golf equipment designed specifically for women, to help get us there. Another focus will be continuing to expand our international reach. In 2007, international sales represented approximately 47% of revenue and 53% of profits. With our commitment to growing our business both at home...

  • Page 8
    ...Group LLC; Retired Former Partner, Gibson Dunn & Crutcher LLP Jeffrey M. Colton Senior Vice President, Research and Development John C. Cushman, III Chairman, Cushman & Wakefield, Inc. Bradley J. Holiday Senior Executive Vice President and Chief Financial Officer Yotaro Kobayashi Chief Corporate...

  • Page 9
    ... Registered Public Accounting Firm M EETING A ND INFORM ATION The 2008 Annual Meeting of Shareholders Tuesday, May 20, 2008 Callaway Golf Company 2180 Rutherford Road Carlsbad, CA 92008 760.931.1771 For more information visit the company's websites: Deloitte & Touche LLP 695 Town Center Drive...

  • Page 10
    ... ANNUAL REPORT For the fiscal year ended December 31, 2007 CERTIFICATIONS In June 2007, the Company filed with the New York Stock Exchange the Annual CEO Certification required under Section 303A.12(a) of the NYSE's Listed Company Manual regarding the Company's compliance with the NYSE's corporate...

  • Page 11
    ... was $1,227,008,320 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, shares held in treasury, and shares held by the Company's grantor stock...

  • Page 12
    ...Explosive Distance.Amazing Soft Feel-Flying Lady-Ft-i-FTi-brid-FT-3-FT-5-FreakFusion-Game Series-Gems-Great Big Bertha-Heavenwood-Hogan-HX-HX Hot-Hx Hot Bite-HX Pearl-HX Tour-Hyper X-IMIX-Little Ben-Marksman-Molitor-Number One Putter in Golf-Odyssey- OptiFit-ORG.14-Rossie-S2H2-Sabertooth-SRT-SenSert...

  • Page 13
    ..., Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...Certain Relationships, Related Transactions and Director Independence ...Principal Accountant Fees and Services ...PART...

  • Page 14
    ...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. The Company currently has...

  • Page 15
    ... Callaway Golf, Top-Flite and Ben Hogan brands. The Company's irons are generally made of metal (either titanium, steel or special alloy) or a composite material (a combination of metal and polymer materials). The Company's products compete at various price levels in the irons category. In general...

  • Page 16
    ..., umbrellas, and other accessories, as well as sales of pre-owned products through Callaway Golf Interactive, Inc. Additionally, this product category includes royalties from licensing of the Company's trademarks and service marks on products such as golf and life style apparel, watches, travel gear...

  • Page 17
    ... is a custom fitting system that enables golfers to experiment at participating on and off-course retail stores with an extensive variety of clubhead and shaft combinations in order to find the driver or set of irons that fits their personal specifications. The OptiFit System equips retailers and...

  • Page 18
    .... This website is also accessible via the Company's main website, www.CallawayGolf.com. The website offers the full line of official Callaway Golf, Top-Flite, Ben Hogan and Odyssey products, including drivers, fairway woods, hybrids, irons, golf balls, footwear, eyewear, apparel and accessories. 5

  • Page 19
    ... on the PGA tour in 2007. In addition, the Company's golf ball products remained number two in U.S. dollar market share in 2007. For both golf clubs and golf balls, the Company generally competes on the basis of technology, quality, performance, customer service and price. In order to gauge the...

  • Page 20
    ...for use on products such as golf apparel, watches, travel gear, rangefinders, practice aids and eyewear. The Company has current licensing arrangements with (i) Ashworth, Inc. for a complete line of men's and women's apparel for distribution in the United States, Canada, Europe and South Africa, (ii...

  • Page 21
    ... 31, 2007, the Company and its subsidiaries had approximately 3,000 full-time and part-time employees. In addition, the Company employs temporary employees as the business requires. Historically, Callaway Golf employees have not been represented by unions. The golf ball manufacturing employees in...

  • Page 22
    ... all of its revenues from the sale of golf related products, including golf clubs, golf balls and golf accessories. The demand for golf related products, generally, and golf balls in particular, is directly related to the number of golf participants and the number of rounds of golf being played by...

  • Page 23
    ... experience significant production delays or disruption to its business. The Company also depends on a single or a limited number of suppliers for the materials it uses to make its golf balls. Many of these materials are customized for the Company. Any delay or interruption in such supplies could...

  • Page 24
    ... to its U.S. customers. The Company uses air carriers and ship services for most of its international shipments of products. Furthermore, 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. The...

  • Page 25
    ... are diverted from golf and become focused on issues relating to these events. If such events disrupt 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 would be harmed...

  • Page 26
    ...'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...

  • Page 27
    ...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...

  • Page 28
    ... Company sells and distributes its products directly 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...

  • Page 29
    ...'s operations, financial performance and condition. If the Company's customers and distributors do not pay for their purchases in a timely manner, the Company's financial results would be harmed. The Company primarily sells its products to golf equipment retailers directly and through wholly owned...

  • Page 30
    ... and leases a number of other properties domestically and internationally, including properties in Australia, Canada, Japan, Korea, the United Kingdom and China. 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...

  • Page 31
    ... complaint denying infringement of any valid patent and asserting counterclaims against Callaway Golf. Acushnet asserts that sales of Callaway Golf's FT-i, FT-5, X-460, X-460 Tour, Big Bertha Fusion FT-3 and Big Bertha 460 drivers infringe two patents issued to Acushnet, namely U.S. patent numbers...

  • Page 32
    ... Exchange Listed Company Advisory Committee. Mr. Fellows graduated with a B.S. degree from City College of New York, received an MBA from Columbia University and completed the Harvard Advanced Management Program. Steven C. McCracken is Senior Executive Vice President, Chief Administrative Officer...

  • Page 33
    ... Graduate School of International Management (Thunderbird) in Arizona. Information with respect to the Company's employment agreements with its Chief Executive Officer, Chief Financial Officer and other three most highly compensated executive officers will be contained in the Company's definitive...

  • Page 34
    ...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, 2008, the approximate number...

  • Page 35
    ... 171.73 108.76 161.20 187.17 131.55 166.89 199.70 The Callaway Golf Company index is based upon the closing prices of Callaway Golf Company Common Stock on December 31, 2002, 2003, 2004, 2005, 2006 and 2007 of $13.25, $16.85, $13.50, $13.84, $14.41 and $17.43, respectively...

  • Page 36
    ... 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...

  • Page 37
    ... 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. Purchases of Equity Securities by the Issuer and Affiliated Purchasers In June 2007, the Board of Directors authorized a new...

  • Page 38
    ... elsewhere in this report. 2007 Year Ended December 31, 2006 2005 2004(1) (In thousands, except per share data) 2003(2) Statement of Operations Data: Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Research and development expenses ...Income (loss...

  • Page 39
    ..., "Revenue Recognition in Financial Statements," as products are shipped to customers, net of an allowance for sales returns and accruals for sales programs. The Company records a reserve for anticipated returns through a reduction of sales and cost of sales in the period that the related sales are...

  • Page 40
    ... and circumstances related to its business when applying these impairment rules. To determine fair value, the Company uses its internal cash flow estimates discounted at an appropriate interest rate, quoted market prices and royalty rates when available and independent appraisals, as appropriate...

  • Page 41
    ... 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...

  • Page 42
    ... that will ultimately be realized by an employee. The Company uses historical data to estimate the expected price volatility, the expected dividend yield, the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of...

  • Page 43
    ... of products, which are segregated between golf clubs and golf balls. The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters. This segment also includes other golf-related accessories described above...

  • Page 44
    ... results, see "Golf Club and Golf Ball Segments Results" below. Net sales information by region is summarized as follows (dollars in millions): Years Ended December 31, 2007 2006 Growth (Decline) Dollars Percent Net sales: United States ...Europe ...Japan ...Rest of Asia ...Other foreign countries...

  • Page 45
    ... golf ball intellectual property rights litigation and a $1.8 million increase in professional fees primarily related to consulting services. These increases were partially offset by a $5.4 million gain recognized in connection with the sale of two buildings in August and December of 2007. Research...

  • Page 46
    ... to the prior year introduction of steel irons products which generally have lower average selling prices. The $6.4 million (6%) increase in net sales of putters to $109.1 million for the year ended December 31, 2007 resulted primarily from an increase in average selling prices offset by lower unit...

  • Page 47
    ... offset by net sales of the D2 golf ball introduced in the current year. The increase in unit volume for the Callaway Golf balls is attributable to favorable consumer acceptance of the Company's current year product introductions, including the new 2007 HX Hot, Big Bertha and Warbird golf ball...

  • Page 48
    ...resulting from a shift in product mix toward increased sales of more premium Callaway branded golf balls and the introduction of a higher-priced Top-Flite branded golf ball combined with a decline in sales of lower margin range balls during the year ended December 31, 2007. Additionally, during 2006...

  • Page 49
    ...in sales in Europe, as a result of a general decline in the golf equipment market due to unfavorable weather conditions in that region and the World Cup soccer event, which reduced traffic in golf retail stores, as well as a decline in Top-Flite and Ben Hogan sales. The Company's 2006 net sales were...

  • Page 50
    ... half of 2005. These increases were partially offset by a reduction in average selling price of the Company's older Ben Hogan and Callaway Golf brand driver and fairway woods products. The increase in units sold is primarily due to the launch of steel fairway woods and multi-material hybrid clubs...

  • Page 51
    ...sales of Callaway Golf brand golf bag and accessories and other products as well as an increase in licensing revenue and revenue from the Company's Trade In! Trade Up! pre-owned golf club program. These increases were partially offset by a decrease in sales of Top-Flite and Ben Hogan brand golf bags...

  • Page 52
    ... in gross profit resulted from a reduction in average selling prices of older Top-Flite brand golf ball products, an increase in sales of lower priced, lower margin golf ball products as well as an overall increase in golf ball manufacturing costs. In addition, during 2006, the Company recorded...

  • Page 53
    ...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, which would...

  • Page 54
    ... 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...

  • Page 55
    ... to manage electricity costs in the volatile California energy market. The contract was originally effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract and...

  • Page 56
    ...investment in Golf Entertainment International Limited ("GEI"), the owner and operator of TopGolf entertainment centers. In connection with this investment, the Company acquired Preferred Shares of GEI for approximately $10.0 million. The Company accounts for this investment under the cost method in...

  • Page 57
    ... financial instruments, calculated using the sensitivity analysis model described above is $3.3 million at December 31, 2007. 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...

  • Page 58
    ... reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring...

  • Page 59
    ... PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Callaway Golf Company Carlsbad, CA We have audited the internal control over financial reporting of Callaway Golf Company and its subsidiaries (the "Company") as of December 31, 2007, based on criteria established in Internal Control...

  • Page 60
    ... 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 will be included in the Company's definitive Proxy...

  • Page 61
    ... Income for the years ended December 31, 2007, 2006 and 2005; 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...

  • Page 62
    ... Company First Amendment to Chief Executive Officer Employment Agreement, effective as of April 19, 2007, by and between Callaway Golf Company and George Fellows, incorporated herein by this reference to Exhibit 10.47 to the Company's Quarterly Report on Form 10-K, as filed with the Commission on...

  • Page 63
    ... Form of Non-Employee Director Restricted Stock Unit Grant Agreement, incorporated herein by this reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Commission on March 1, 2007 (file no. 1-10962). Callaway Golf Company 2004...

  • Page 64
    ... by this reference to Exhibit A to the Company's annual proxy statement on Schedule 14A, as filed with the Securities and Exchange Commission on April 23, 2007 (file no. 1-10962). Callaway Golf Company 2008 Senior Management Incentive Program, incorporated herein by this reference to Exhibit 10.48...

  • Page 65
    ... 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 66
    ....†Form of Limited Power of Attorney.†Certification of George Fellows pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of...Sarbanes-Oxley Act of 2002.†Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of...

  • Page 67
    ...(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 28, 2008 Pursuant to the...

  • Page 68
    Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, George Fellows, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Callaway Golf Company; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact ...

  • Page 69
    ... in this report; The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15...

  • Page 70
    ... 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, 2007, as filed with the Securities and Exchange Commission (the "10-K Report"), that: (1) the 10-K Report...

  • Page 71
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2007 and 2006 ...Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 ...Consolidated Statements of Cash Flows ...

  • Page 72
    ... REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Callaway Golf Company Carlsbad, CA We have audited the accompanying consolidated balance sheets of Callaway Golf Company and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated...

  • Page 73
    ... 31, 2007 2006 ASSETS Current assets: Cash and cash equivalents ...Accounts receivable, net ...Inventories, net ...Deferred taxes ...Income taxes receivable ...Other current assets ...Total current assets ...Property, plant and equipment, net ...Intangible assets, net ...Goodwill ...Deferred...

  • Page 74
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) 2007 Year Ended December 31, 2006 2005 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 75
    ...operating activities ...Cash flows from investing activities: Capital expenditures ...Proceeds from sale of capital assets ...Investment in golf related ventures ...Acquisitions, net of cash acquired ...Net cash used in investing activities ...Cash flows from financing activities: Issuance of common...

  • Page 76
    CALLAWAY GOLF... of stock options ...51 Tax benefit from exercise of stock options ...-...Employee stock purchase plan ...- Cash dividends ...- Adjustment of Grantor Stock Trust shares to market value ...- Equity adjustment from foreign currency translation ...- Net income ...- Balance, December 31, 2007...

  • Page 77
    ... 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, watches, travel gear, eyewear and other golf accessories. Note 2. Significant Accounting Policies Principles of Consolidation The...

  • Page 78
    ... 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...

  • Page 79
    ... yet been placed into service, unfinished molds as well as in-process internally developed software. In accordance with American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company...

  • Page 80
    ... and intangible assets consist of goodwill, trade names, trademarks, service marks, trade dress, patents and other intangible assets acquired during the acquisition of Odyssey Sports, Inc., the Top-Flite assets, FrogTrader, Inc., the Tour Golf Group assets and certain foreign distributors. In...

  • Page 81
    ... or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred income tax expense or benefit is the net change during the year in the deferred income tax asset or liability. Effective January 1, 2007, the Company was required...

  • Page 82
    ...-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 83
    ... 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 settled. Recent Accounting Pronouncements On...

  • Page 84
    ... the option to supply golf balls for the TopGolf driving ranges, rights as the preferred supplier of golf products used or offered for use at TopGolf facilities at prices no less than those paid by the Company's customers, preferred retail positioning in the TopGolf retail stores, access to consumer...

  • Page 85
    ...golf ball manufacturing equipment and cash charges related to severance and facility consolidations in connection with the Company's full integration of the Callaway Golf ball manufacturing with the Top-Flite golf ball manufacturing at the Chicopee, Massachusetts and Gloversville, New York locations...

  • Page 86
    ... Information December 31, 2007 2006 (In thousands) Accounts receivable, net: Trade accounts receivable ...Allowance for doubtful accounts ...Inventories, net: Raw materials ...Work-in-process ...Finished goods ...Property, plant and equipment, net: Land ...Buildings and improvements ...Machinery...

  • Page 87
    ...,000 and $3,045,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Amortization expense related to intangible assets at December 31, 2007 in each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands): 2008 ...2009 ...2010 ...2011 ...2012...

  • Page 88
    ... currency contracts used to manage balance sheet exposures are recognized as a component of other income (expense) in the same year as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities and thus generally offset these gains and losses. During 2007 and...

  • Page 89
    ...employees and non-employees (see Note 11). 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... a net loss is reported. For the years ended December 31, 2007, 2006...

  • Page 90
    ... conditions and buying opportunities, up to a maximum cost to the Company of $50,000,000, which would remain in effect until completed or otherwise terminated by the Board of Directors (the "June 2006 repurchase program"). In June 2007, the Board of Directors authorized a new repurchase program...

  • Page 91
    ... Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payment," which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. The Company adopted SFAS 123R using the modified prospective...

  • Page 92
    ... 1, 2006. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model uses various assumptions, including a risk-free interest rate, the expected term of the options...

  • Page 93
    ..., the estimated fair value of an option does not necessarily represent the value that will ultimately be realized by the employee holding the option. The following table summarizes the Company's stock option activities for the year ended December 31, 2007 (in thousands, except price per share and...

  • Page 94
    ... Performance Share Units (collectively "nonvested shares") is determined based on the closing trading price of the Company's Common Stock on the grant date. A summary of the Company's nonvested share activity for the year ended December 31, 2007 is as follows (in thousands, except fair value amounts...

  • Page 95
    .... There were no amounts relating to employee share-based compensation capitalized in inventory during the years 2007, 2006 and 2005. Note 12. 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...

  • Page 96
    ... 31, 2007 2006 Deferred tax assets: Reserves and allowances ...Compensation and benefits ...Effect of inventory overhead adjustment ...Compensatory stock options and rights ...Revenue recognition ...Long-lived asset impairment ...Operating loss carryforwards ...Tax credit carryforwards ...Energy...

  • Page 97
    ...): Year Ended December 31, 2007 2006 2005 Amounts computed at statutory U.S. tax rate ...State income taxes, net of U.S. tax benefit ...State tax credits, net of U.S. tax benefit ...Federal research tax credits ...Expenses with no tax benefit ...Share based compensation ...Domestic manufacturing...

  • Page 98
    ... for income taxes. As of December 31, 2007, and 2006, the Company had accrued $1,524,000 and $1,050,000, respectively, (before income tax benefit) for the payment of interest and penalties. The Internal Revenue Service field examination of tax years 2001 through 2003 is complete and certain issues...

  • Page 99
    ...91, asserting claims against Acushnet Company for patent infringement. Specifically, Callaway Golf asserted 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 Golf is seeking...

  • Page 100
    ... complaint denying infringement of any valid patent and asserting counterclaims against Callaway Golf. Acushnet asserts that sales of Callaway Golf's FT-i, FT-5, X-460, X-460 Tour, Big Bertha Fusion FT-3 and Big Bertha 460 drivers infringe two patents issued to Acushnet, namely U.S. patent numbers...

  • Page 101
    ... into a long-term, fixed-priced, fixedcapacity, energy supply contract (the "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 energy while capping electricity costs in the volatile...

  • Page 102
    ... in accordance with applicable law and accounting regulations, including 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 December 31, 2007, EESI has not asserted any...

  • Page 103
    ... 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...

  • Page 104
    ... 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, hybrids, irons, wedges and putters as well as Odyssey putters, other golf-related accessories and royalties from licensing of the...

  • Page 105
    ... and service marks to third parties for use on products such as golf apparel, watches, travel gear, rangefinders and eyewear. The Company has current licensing arrangements with (i) Ashworth, Inc. for a complete line of men's and women's apparel for distribution in the United States, Canada, Europe...

  • Page 106
    ... line of men's and women's apparel for distribution in Australia and New Zealand. In addition to apparel, the Company has also licensed its trademarks to, among others, (i) Fossil, Inc. for a line of Callaway Golf watches and clocks, (ii) TRG Accessories, LLC for a collection primarily consisting...

  • Page 107
    ...QUALIFYING ACCOUNTS For the Years Ended December 31, 2007, 2006 and 2005 Allowance for Sales Returns Allowance for Warranty Doubtful Reserves Accounts (In thousands) Reserve for Obsolete Inventory Date Balance, December 31, 2004 ...Provision ...Write-off, disposals, costs and other, net ...Balance...

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    PRINTING: RR DONNELLEY COMPANY DESIGN AND PRODUCTION: TROY MCMONIGAL ART DIRECTION: JEFF ADAMOFF

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