Callaway 2008 Annual Report Download

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Callaway Golf Company 2008 Annual Report

Table of contents

  • Page 1
    Callaway Golf Company 2008 Annual Report

  • Page 2

  • Page 3
    ... of my life. One of the most important things I took away from the Games was seeing how sports can transcend borders, cultures and languages. It also showed me a vision for what our Company can become. Callaway Golf has a unique opportunity - the chance to be the unquestioned leader in bringing this...

  • Page 4
    ...our international business. And despite headwinds we faced in the second half of the year, our Company still finished 2008 with sales figures that nearly matched the record-setting numbers from 2007. There are numerous companies, including some of our competitors, who could only wish to make a claim...

  • Page 5
    ...and help carry the Callaway Golf banner to the four corners of the Earth, proudly and with goodwill. Our Tour pros are one of the many avenues we are using to continue making Callaway Golf a global Company. While we already sell products in over 110 countries, many markets represent Annika Sorenstam

  • Page 6
    ... opportunities for growth. In the first 6 months of 2008, for the first time in our Company's history, more than 50 percent of our sales were generated from outside the U.S. While our international business will always be subject to currency exchange fluctuations beyond our control, this is a trend...

  • Page 7
    ... of golfers that will view Callaway Golf as the unquestioned leader in the women's game. Halle Berry expectations. Every round, every hole, every shot represents a new chance for a moment you remember the rest of your life. It's the allure that brings people back day after day, year after year, to...

  • Page 8
    ... of the Board, Co-Chief Executive Officer and Co-President, California Pizza Kitchen, Inc. Michèle M. Szynal Vice President, Public Relations Anthony S. Thornley Retired Former President and Chief Operating Officer, QUALCOMM Incorporated Joseph Urzetta Senior Vice President, U.S. Sales Thomas...

  • Page 9
    CORPORATE DATA Independent Registered Public Accounting Firm MEETING AND INFORMATION The 2009 Annual Meeting of Shareholders Tuesday, May 19, 2009 Sheraton Carlsbad 5480 Grand Pacific Drive Carlsbad, CA 92008 760.827.2400 For more information visit the Company's websites: Deloitte & Touche LLP 695...

  • Page 10
    ... Exchange Commission the certifications of the Company's Chief Executive Officer and Chief Financial Officer required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2 and 32.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008...

  • Page 11
    ... ACT OF 1934 For the fiscal year ended December 31, 2008 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 1-10962 ' Callaway Golf Company (Exact name of registrant as specified in its charter...

  • Page 12
    ... Distance.Amazing Soft Feel-Flying Lady- Ft-i-FTi-brid-FT-3-FT-5-FT-9-Fusion-Freak-Fusion-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...

  • 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
    ..., 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 golf bags, golf gloves, golf footwear, golf and lifestyle apparel, golf headwear, eyewear, golf towels and golf umbrellas...

  • Page 15
    ...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, Top-Flite and Ben Hogan brands. These products are generally made of metal (either titanium or steel) or a combination...

  • Page 16
    ... club sets, headwear, towels, umbrellas, eyewear 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...

  • Page 17
    ...golfers' individual swing in order to find the set of golf clubs that fits their personal specifications. The Optifit Fitting System is also utilized by participating on-and off-course retail stores. In addition, the Company utilizes iron and wood fitting carts as well as tour fitting vans with club...

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

  • Page 19
    ... two position on the PGA tour in 2008. In addition, the Company's golf ball products remained number two in U.S. dollar market share in 2008. 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...

  • Page 20
    ..., Canada, Europe and South Africa. In the fourth quarter of 2008 Ashworth, Inc. was acquired by the Taylor-Made-adidas Golf business. As a result, the Company elected to terminate its arrangement with Ashworth, Inc. and is actively working to transition the golf apparel licensing business to a new...

  • Page 21
    ... 31, 2008, the Company and its subsidiaries had approximately 2,700 full-time and part-time employees. In addition, the Company employs temporary workers as the business requires. Historically, Callaway Golf employees have not been represented by unions. The golf ball manufacturing employees in...

  • Page 22
    ... discretionary spending and therefore reduce sales of the Company's products. 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...

  • Page 23
    ... affect the Company's sales. The Company generates substantially 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...

  • Page 24
    ... number of suppliers for its clubheads and shafts, some of which are single sourced. Furthermore, some of the Company's products require specifically developed manufacturing techniques and processes which make it difficult to identify and utilize alternative suppliers quickly. In addition, many...

  • Page 25
    ... delivery or shipping services were to increase significantly and the additional costs could not be covered by product pricing, the Company's operating results could be significantly adversely affected. The Company faces intense competition in each of its markets. Golf Clubs. The golf club business...

  • Page 26
    ...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 reorder business for golf clubs. Sales of golf...

  • 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
    ... harm the Company's reputation. Some of the Company's products find their way to unauthorized 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...

  • Page 29
    .... 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...

  • Page 30
    ... in pre-tax charges in order to ready the golf ball manufacturing facility for sale and is currently committed to an active program to sell the property. In addition, the Company owns and leases a number of other properties domestically and internationally, including properties in Australia, Canada...

  • Page 31
    ... SAG's Pension and Health Plans ("Plans") seeking declaratory and injunctive relief. Specifically, the Plans contend that Callaway Golf is required to treat a significant portion of the sums paid to professional golfers who endorse the Company's products as compensation for "acting services," and to...

  • Page 32
    ..., for the District of Utah, Case No. 08CV116. Specifically, Ogio alleges that Callaway Golf's sales of Warbird XTT, Warbird Hot, Terra Firma X, Terra Firma XI, CX Cart, Euro Stand, and Matrix and Hyper-X golf bags infringe one or more claims of United States Patents numbered 6,877,604 and 7,213,705...

  • Page 33
    ... Fellows was a member of senior management of Revlon, Inc. from 1993 to 1999, including his terms as President, which commenced in 1995, and Chief Executive Officer, which began in 1997. He is a member of the board of directors of VF Corporation (a global apparel company) and the California Governor...

  • Page 34
    ... in such capacity since joining the Company in July 2006. Until July 2006, Mr. Yang served as Senior Vice President of Global Consumer Products, International for Starbucks Corporation, a position he held for the last 16 months of the nearly five years he worked for Starbucks. He also previously...

  • Page 35
    ...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 January 31, 2009, the...

  • Page 36
    ... graph presents a comparison of the cumulative total shareholder return since December 31, 2003 of the Company's Common Stock, ...93.46 The Callaway Golf Company index is based upon the closing prices of Callaway Golf Company Common Stock on December 31, 2003, 2004, 2005, 2006, 2007 and 2008 of $16.85...

  • Page 37
    ... the 1995 Plan or the Promotion Plan at December 31, 2008. For additional information, see Note 12 "Share-Based Compensation" to the Notes to Consolidated Financial Statements. 1995 Plan. Under the 1995 Plan, the Company granted stock options to non-executive officer employees and consultants of the...

  • Page 38
    ... 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 November 2007, the Board of Directors authorized a repurchase program...

  • Page 39
    ... elsewhere in this report. 2008 Year Ended December 31, 2007 2006 2005(2) (In thousands, except per share data) 2004(1),(2) Statement of Operations Data: Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Research and development expenses ...Income (loss...

  • Page 40
    ...includes certain assets and liabilities of uPlay, LLC. (4) In the fourth quarter of 2008, the Company reversed a $19.9 million energy derivative valuation account. See Note 15 "Commitments and Contingencies-Supply of Electricity and Energy Contracts" to the Consolidated Financial Statements. (5) The...

  • Page 41
    ..., changes in customer demands and sell-through of products. In addition, from time to time, the Company offers sales programs that allow for specific returns. The Company records a reserve for anticipated returns related to these sales programs based on the terms of the sales program as well as...

  • Page 42
    ... time to time offers additional sales program incentive offerings which are also generally short term in nature. Historically the Company's actual costs related to its Preferred Retailer Program and other sales programs have not been materially different than its estimates. Revenues from gift cards...

  • Page 43
    ... 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 44
    ... years, particularly if litigation is involved. The ultimate resolution of these tax positions is often uncertain until the audit is complete and any disagreements are resolved. As required under applicable accounting rules, the Company therefore accrues an amount for its estimate of additional...

  • Page 45
    ... utilizing aerial imagery of each golf hole. The Company acquired uPlay in order to form synergies from co-branding these products with the Callaway Golf brand, promote the global distribution of these products through the Company's existing sales force and create incremental new business...

  • Page 46
    ... 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 and royalties from licensing of the Company's trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls...

  • Page 47
    ... impact sell-through and reorders of the Company's products in 2009. Management expects that sales of golf equipment in 2009 will be less than 2008 for the industry as a whole. In addition, management believes that the turmoil in the foreign currency markets experienced in the second half of 2008...

  • Page 48
    ... of each operating segment's 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, 2008 2007 Growth (Decline) Dollars Percent Net sales: United States ...Europe ...Japan ...Rest of...

  • Page 49
    ... gross margin improvement charges during the year ended December 31, 2008 is primarily due to costs associated with the consolidation of golf ball production operations into other existing locations, which resulted in the closure of the Company's golf ball manufacturing facility in Gloversville, New...

  • Page 50
    ...premium Fusion Technology drivers, carry a higher sales price than fairway woods and hybrids. In addition, average selling prices were negatively affected during the year ended December 31, 2008 by planned price reductions on older woods products, primarily on Big Bertha 460 titanium drivers, Fusion...

  • Page 51
    ... Top-Flite packaged recreational sets in addition to an increase in sales of the Callaway Golf Collection line of accessories and golf gloves. Golf Balls Segment Net sales information for the golf balls segment is summarized as follows (dollars in millions): Years Ended December 31, 2008 2007 Growth...

  • Page 52
    ...club products. In addition, gross margin was negatively affected by price reductions taken on older woods products, primarily on Big Bertha 460 drivers, Fusion Technology drivers, X fairway woods and the region specific Hyper ERC titanium driver. These decreases in gross margin were partially offset...

  • Page 53
    ... the Company's new products. The Company's net sales were positively affected during 2007 by changes in foreign currency rates, primarily in Europe, Australia, Canada and Korea partially offset by unfavorable foreign currency rate changes in Japan. For the year ended December 31, 2007, gross profit...

  • Page 54
    ... with current year new product introductions as well as the previously announced re-launch of the Top-Flite brand, and depreciation expense increased $2.2 million as a result of an increase in display and shelving fixtures as well as fitting carts acquired during 2007. General and administrative...

  • Page 55
    ... in average selling prices is attributable to the current year introduction of the White Hot XG and Black Series putter product lines. The decrease in unit volume is primarily due to decreases in sales of the Company's older White Hot, White Steel, Tri-ball and 2-ball SRT putter products, which were...

  • Page 56
    ... in unit volume for the Callaway Golf balls was 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 product lines. Segment Profitability Profitability by operating segment is summarized as...

  • Page 57
    ... as the result of new product introductions during the fourth quarter of 2008 as well as slightly longer standard payment terms for the Company's off-course customers in connection with the current year sales programs. During 2008, the Company used its cash generated from operating activities of $41...

  • Page 58
    ... of market conditions and buying opportunities, up to a maximum cost to the Company of $100.0 million, which would remain in effect until completed or otherwise terminated by the Board of Directors. The November 2007 repurchase program supersedes all prior stock repurchase authorizations and...

  • Page 59
    ... 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...

  • Page 60
    ... made an 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...

  • Page 61
    ... reported financial results in 2009 compared to 2008 (see above, "Certain Factors Affecting Callaway Golf Company" contained in Item 1A and "Results of Operations" contained in Item 7). The Company is exposed to foreign currency exchange rate risk inherent primarily in its sales commitments...

  • Page 62
    ... Supplementary Data The Company's Consolidated Financial Statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008, together with the reports of our independent registered public accounting firm, are included in this Annual Report on Form 10...

  • Page 63
    ... reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring...

  • Page 64
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Callaway Golf Company Carlsbad, California We have audited the internal control over financial reporting of Callaway Golf Company and its subsidiaries (the "Company") as of December 31, 2008, based on...

  • Page 65
    ... fiscal year 2008 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...

  • Page 66
    ...Income for the years ended December 31, 2008, 2007 and 2006; 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...

  • Page 67
    ... to Exhibit 10.49 to the Company's Current Report on Form 8-K, as filed with the Commission on May 6, 2008 (file no. 1-10962). Callaway Golf Company First Amendment to the Officer Employment Agreement, effective as of January 26, 2009, by and between the Company and Thomas Yang.†Form of Notice...

  • Page 68
    ... Callaway Golf Company Executive Deferred Compensation Plans, incorporated herein by this reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Commission on February 27, 2006 (file no. 1-10962). Callaway Golf Company Employee...

  • Page 69
    ...Callaway Golf Company 2008 Senior Management Incentive Program, incorporated herein by this reference to Exhibit 10.48 to the Company's Current Report on Form 8-K, as filed with the Commission on January 18, 2008 (file no. 1-10962). Indemnification Agreement, dated April 7, 2004, between the Company...

  • Page 70
    ... 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 71
    ... duly authorized. CALLAWAY GOLF COMPANY By: /s/ GEORGE FELLOWS George Fellows President and Chief Executive Officer Date: February 26, 2009 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...

  • Page 72
    ...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/ GEORGE FELLOWS 3. 4. George Fellows President and Chief Executive Officer Date: February 26, 2009 59

  • Page 73
    ..., 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 3. 4. Bradley J. Holiday Senior Executive Vice President and Chief Financial Officer Date: February 26, 2009 60

  • Page 74
    ... 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, 2008, as filed with the Securities and Exchange Commission (the "10-K Report"), that: (1) the 10-K Report...

  • Page 75
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2008 and 2007 ...Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006 ...Consolidated Statements of Cash Flows ...

  • Page 76
    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, 2008 and 2007, ...

  • Page 77
    ... ...Property, plant and equipment, net ...Intangible assets, net ...Goodwill ...Deferred taxes, net (Note 14) ...Other assets ...LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ...Accrued employee compensation and benefits ...Accrued warranty expense...

  • Page 78
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2007 2008 2006 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 79
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2008 2007 2006 Cash flows from operating activities: Net income ...$ 66,176 $ 54,587 $ 23,290 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and ...

  • Page 80
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands) Accumulated Other Grantor Treasury Stock Common Stock Additional Paid-in Unearned Retained Comprehensive Stock Shares Amount Capital Compensation Earnings Income (Loss) Trust Shares Amount ...

  • Page 81
    ..., 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 golf bags, golf gloves, golf footwear, golf and lifestyle apparel, golf headwear, eyewear, golf towels and golf umbrellas...

  • Page 82
    ... 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 83
    ... the Company's building consolidation project, machinery and equipment that have not 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...

  • Page 84
    ... 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, the uPlay, LLC assets and certain foreign distributors...

  • Page 85
    ... uses forecasted performance metrics to estimate the number of Performance Share Units to be issued as well as approval from the Compensation and Management Succession Committee of the Board of Directors. The Company's performance against the specified performance targets is reviewed quarterly...

  • Page 86
    ... 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 and Top-Flite golf balls that are designed, manufactured and sold by the Company...

  • Page 87
    ...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 In December 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-4 and...

  • Page 88
    ... 31, 2008. Note 3. Investments Investment in Golf Entertainment International Limited Company The Company has a $10,000,000 investment in the Preferred Shares of Golf Entertainment International Limited ("GEI"), the owner and operator of TopGolf entertainment centers. The Company accounts for this...

  • Page 89
    ... utilizing aerial imagery of each golf hole. The Company acquired uPlay in order to form synergies from co-branding these products with the Callaway Golf brand, promote the global distribution of these products through the Company's existing sales force and create incremental new business...

  • Page 90
    ...improve the profitability of its golf ball business, the Company has taken actions to consolidate its golf ball operations into other existing locations. As a result of these initiatives, in May 2008, the Company announced the closure of its golf ball manufacturing facility in Gloversville, New York...

  • Page 91
    ...of the Callaway Golf, Odyssey, Top-Flite and Ben Hogan selling functions, as well as the elimination or reduction of other operating expenses. In connection with the 2005 Restructuring Initiatives, the Company committed to staff reductions that involved the elimination of approximately 500 positions...

  • Page 92
    ... annual impairment test. The following sets forth the intangible assets by major asset class: Useful Life (Years) December 31, 2008 Accumulated Net Book Gross Amortization Value (In thousands) December 31, 2007 Accumulated Net Book Gross Amortization Value (In thousands) Non-Amortizing: Trade name...

  • Page 93
    ... sheet. Note 9. Derivatives and Hedging The Company from time to time uses derivative financial instruments to manage its exposure to foreign exchange rates. The derivative instruments are accounted for pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as...

  • Page 94
    ... generally offset these gains and losses. During the years ended December 31, 2008, 2007 and 2006, the Company recorded net losses of $3,251,000, $5,979,000 and $2,064,000, respectively, due to net realized and unrealized losses on contracts used to manage balance sheet exposures that do not qualify...

  • Page 95
    ... program. Grantor Stock Trust 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 nonqualified or qualified employee benefit plans. The GST shares are used...

  • Page 96
    ... compensation expense was reclassified as a component of additional paid-in capital as of January 1, 2006. The Company uses the alternative transition method provided in the FASB Staff Position No. FAS 123R-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards...

  • Page 97
    ... of compensation expense relating to outstanding stock options for the years ended December 31, 2008, 2007 and 2006, respectively. 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...

  • Page 98
    .... Furthermore, 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, 2008 (in thousands, except price...

  • Page 99
    ... years. The amount of unrecognized compensation expense noted above does not necessarily represent the amount that will ultimately be realized by the Company in its Statement of Operations. Employee Stock Purchase Plan On February 1, 2006, the Company amended and restated the Callaway Golf Company...

  • Page 100
    ... $705,000 for the year ended December 31, 2008 to revalue shares of Restricted Stock at market value. Note 13. 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...

  • Page 101
    ...Company's income before income tax provision was subject to taxes in the following jurisdictions for the following periods (in thousands): Year Ended December 31, 2008... 289 653 1,587 $11,708 During 2008, 2007 and 2006, tax benefits related to the exercise or vesting of stock-based awards were ...

  • Page 102
    ... expense for the year ended December 31, 2008. Of the total tax credit carryforwards of $2,780,000 at December 31, 2008, the Company has state investment tax credits of $646,000, which expire in 2009 and $1,527,000 that generally do not expire and state research and development credit carryforwards...

  • Page 103
    ... is generally referred to as an "unrecognized tax benefit." A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): 2008 2007 Balance at January 1 ...Additions based on tax positions related to the current year ...Additions for tax positions of...

  • Page 104
    ... impact on its results of operations or its financial position. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the year ended December 31, 2008 the Company recognized a benefit of approximately $195,000 related to interest and penalties in...

  • Page 105
    ..., Case No. C.A. 06-91, 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...

  • Page 106
    ..., for the District of Utah, Case No. 08CV116. Specifically, Ogio alleges that Callaway Golf's sales of Warbird XTT, Warbird Hot, Terra Firma X, Terra Firma XI, CX Cart, Euro Stand, and Matrix and Hyper-X golf bags infringe one or more claims of United States Patents numbered 6,877,604 and 7,213,705...

  • Page 107
    ... based on the asserted use and transfer of corporate trade credits to the Company in connection with assets from Top-Flite in 2003. On January 26, 2009, CTI filed its own suit in the United States District Court for the Southern District of New York, case no. 09CV0698, asserting claims for breach of...

  • Page 108
    ... 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...

  • Page 109
    ... 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...

  • Page 110
    ... 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 Company's trademarks and service marks. The golf balls...

  • Page 111
    ...(1) Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability. In 2008, the reconciling items include a one-time reversal of $19,922,000 in connection with the Company's termination of a long-term energy supply...

  • Page 112
    ... and service marks to third parties for use on products such as golf apparel, watches, travel gear, rangefinders and practice aids. The Company has current licensing arrangements with (i) Sanei International Co., Ltd. for a complete line of men's and women's apparel for distribution in Japan, Korea...

  • Page 113
    ..., Canada, Europe and South Africa. In the fourth quarter of 2008 Ashworth, Inc. was acquired by the Taylor-Made-adidas Golf business. As a result, the Company elected to terminate its arrangement with Ashworth, Inc. and is actively working to transition the golf apparel licensing business to a new...

  • Page 114
    SCHEDULE II CALLAWAY GOLF COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2008, 2007 and 2006 Allowance for Sales Returns Allowance for Warranty Doubtful Reserves Accounts (In thousands) Reserve for Obsolete Inventory Date Balance, December 31, 2005 ...$ 6,...

  • Page 115
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