Callaway 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 Callaway annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

CALLAWAY GOLF COMPANY
ANNUAL REPORT 2 010

Table of contents

  • Page 1
    CALLAWAY GOLF COMPANY ANNUAL REPORT 2010

  • Page 2

  • Page 3
    The most complete brand in golf.

  • Page 4
    2010 ANNUAL REPORT TO MY FELLOW SHAREHOLDERS, When the economic crisis hit the golf industry in mid-2008, we made the decision to weather that crisis with a balanced approach between managing costs and continuing to invest in initiatives that would benefit our business once the economic headwinds ...

  • Page 5
    ... our global manufacturing and distribution operations. This plan involves moving a majority of our North American club production capabilities from Callaway Headquarters in Carlsbad to a new facility in Monterrey, Mexico. In addition, we are reorganizing our distribution footprint, utilizing third...

  • Page 6
    2010 ANNUAL REPORT by the Callaway and Odyssey brands recently combining to earn the most medals on the annual Golf Digest "Hot List" for the 5th consecutive year. Leading the way were the RAZR Hawk and Diablo Octane Drivers, which feature the groundbreaking new material Forged Composite. Developed...

  • Page 7
    ...to doing what we do best - selling the most innovative golf equipment in the game. I would like to thank all of our talented employees for their loyalty and dedication, our customers for their ongoing support of our brands, and our consumers for making our products a part of their golfing lifestyle...

  • Page 8
    ...and Managing Partner Global Infrastructure Management, LLC Joseph Urzetta Senior Vice President, U.S. Sales Richard L. Rosenfield Co-Founder, Co-Chairman of the Board, Co-Chief Executive Officer and Co-President, California Pizza Kitchen, Inc. Thomas T. Yang Senior Vice President, International...

  • Page 9
    ..., 2011 Callaway Golf Company Headquarters 2180 Rutherford Road Carlsbad, CA 92008 760.931.1771 For more information visit the Company's websites: Deloitte & Touche LLP 695 Town Center Drive, Suite 1200 Costa Mesa, CA 92626 Transfer Agent and Registrar BNY Mellon Shareowner Services 480 Washington...

  • Page 10
    ... effects on the company's business in Japan resulting from the recent natural disasters, future changes in foreign currency rates, consumer acceptance and demand for the Company's products, the level of promotional activity in the marketplace, future consumer discretionary purchasing activity (which...

  • Page 11
    ... ACT OF 1934 For the fiscal year ended December 31, 2010 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
    ... and Pleasingly Different-Diablo Edge-Diablo Forged-Dimple-in-Dimple-Divine Line-Eagle-ERC-Explosive Distance. Amazing Soft Feel-Flying Lady-FTi-brid-FTiQ-FTiZ-FT Performance-FT Tour-FT-5-FT-9-Freak-Fusion-Game Series-Gems-Great Big Bertha-Heavenwood- Hogan-HX-HX Bite-HX Hot Plus-HX Hot Bite-IMIX...

  • 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 IV. Item...

  • Page 14
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 15
    ...In addition, the Company has an online store where consumers can place an order for Callaway Golf, Top-Flite, Ben Hogan and Odyssey products through its website Shop.CallawayGolf.com. The Company also licenses its trademarks and service marks in exchange for a royalty fee to third parties for use on...

  • Page 16
    ... Callaway Golf Company" contained in Item 1A. The following table sets forth the contribution to net sales attributable to the principal product groups for the periods indicated: 2010 Year Ended December 31, 2009(1) (Dollars in millions) 2008 Drivers and fairway woods ...Irons ...Putters ...Golf...

  • Page 17
    ... multilayer golf balls sell at higher price points than its 2-piece golf balls. Accessories and Other. This product category includes sales of golf bags, golf gloves, golf footwear, GPS on-course range finders, golf and lifestyle apparel, packaged club sets, headwear, towels, umbrellas, eyewear and...

  • Page 18
    ... service appropriate for the sale of such products. The Company also sells certain products to mass merchants. On a consolidated basis, no one customer that distributes golf clubs or golf balls in the United States accounted for more than 6% of the Company's consolidated revenues in 2010 and 2009...

  • Page 19
    ... in Item 1A below. Sales of Pre-Owned/Outlet Golf Clubs and Online Store The Company sells certified pre-owned golf products in addition to golf and lifestyle apparel and golfrelated accessories through its websites, www.callawaygolfpreowned.com and www.callawaygolfoutlet.com. The Company generally...

  • Page 20
    ... Company also offers the full line of Callaway Golf, Top-Flite and Odyssey products, including drivers, fairway woods, hybrids, irons, putters, golf balls, footwear, eyewear, golf and lifestyle apparel and golf-related accessories, including uPro GPS on-course range finders, through its website Shop...

  • Page 21
    ... monitored through metrics reporting and reviewed by senior management. • Facilities through the Cool Planet Project (a partnership with the Company's local utility company designed to encourage large industrial customers to install energy efficiency projects in return for cost effective, user...

  • Page 22
    ...below, "Certain Factors Affecting Callaway Golf Company" contained in Item 1A. Licensing The Company from time to time, in exchange for a royalty fee, licenses its trademarks and service marks to third parties for use on products such as golf and lifestyle apparel, watches, travel gear, rangefinders...

  • Page 23
    ... period, he provided legal services to the Company. Mr. McCracken serves on the boards of Pro Kids Golf Academy and Learning Center (First Tee of San Diego) and Top Golf International, Inc. (in which the Company has a minority interest investment) and is Chair of the U.S. Golf Manufacturers Council...

  • Page 24
    ... compensated executive officers will be contained in the Company's definitive Proxy Statement in connection with the 2011 Annual Meeting of Shareholders. In addition, copies of the employment agreements are included as exhibits to this report. Access to SEC Filings through Company Website Interested...

  • Page 25
    ... pay trade obligations. The Company primarily sells its products to golf equipment retailers directly and through wholly-owned domestic and foreign subsidiaries, and to foreign distributors. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires...

  • Page 26
    ... manage the frequent introduction of new products that satisfy changing consumer preferences, it could adversely impact its financial performance and prospects for future growth. The Company's main products, like those of its competitors, generally have life cycles of two years or less, with sales...

  • Page 27
    ... 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 in general, and golf balls in particular, is directly related to the number of golf...

  • Page 28
    ... global supply chain coordination for the relevant golf club or golf ball business segment, including damage to inventory at the respective facilities. In addition, the Company could incur significantly higher costs and longer delivery times associated with fulfilling orders and distributing product...

  • Page 29
    ... the cost of a new club and a pre-owned club. Successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors could negatively impact the Company's future sales. Golf Balls. The golf ball business is also highly competitive...

  • Page 30
    ... operating results and stock price. The Company's business is subject to seasonal fluctuations. The Company's first quarter sales generally represent the Company's sell-in to the golf retail channel of its golf club products for the new golf season. Orders for many of these sales are received during...

  • Page 31
    ...affected. The Company's sales could decline if professional golfers do not endorse or use the Company's products. The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf, Odyssey, Top-Flite and Ben Hogan branded products. The Company has entered...

  • Page 32
    ...stop using the Company's products contrary to their endorsement agreements, the Company's business could be adversely affected in a material way by the negative publicity or lack of endorsement. The Company believes that professional usage of its golf clubs and golf balls contributes to retail sales...

  • Page 33
    ... 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 injure the Company's image in the minds of its customers and consumers...

  • Page 34
    ... operations are located in Carlsbad, California. The Company occupies six buildings that are utilized in its Carlsbad operations, which are comprised of corporate offices and the Company's performance center, as well as manufacturing, research and development, warehousing and distribution facilities...

  • Page 35
    ... Canada, Japan, Korea, the United Kingdom, China, Thailand, Malaysia and India. The Company's operations at each of these properties are used to some extent for both the golf club and golf ball businesses. The Company believes that its facilities currently are adequate to meet its requirements. Item...

  • Page 36
    ... table sets forth the range of high and low per share sales prices of the Company's common stock and per share dividends for the periods indicated. Year Ended December 31, Period: High 2010 Low Dividend High 2009 Low Dividend First Quarter ...Second Quarter ...Third Quarter ...Fourth Quarter...

  • Page 37
    ...industries, including energy, technology, healthcare, financial and manufacturing. The S&P 600 is a market value-weighted index that tracks the aggregate price performance of equity securities from a broad range of small-cap stocks traded in the U.S. The Company...2007 2008 2009 2010 Callaway Golf ...

  • Page 38
    ... cost per share of $7.68 under the November 2007 repurchase program. The Company acquired these shares to satisfy the Company's tax withholding obligations in connection with the vesting and settlement of employee restricted stock unit awards. As of December 31, 2010, the Company remained authorized...

  • Page 39
    ...elsewhere in this report. 2010(1),(2),(3),(4) Year Ended December 31, 2009(2),(3),(4) 2008(5) 2007 (In thousands, except per share data) 2006 Statement of Operations Data: Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Research and development expenses...

  • Page 40
    ... uPlay, LLC. The Company's operating statements for the years ended December 31, 2009 and 2010 include the results of operations of uPlay, LLC. (5) In the fourth quarter of 2008, the Company reversed a $19.9 million energy derivative valuation account. See Note 11 "Derivatives and Hedging-Supply of...

  • Page 41
    ...reduction of sales and cost of sales in the period that the related sales are recorded. Sales returns are estimated based upon historical returns, current economic trends, changes in customer demands and sell-through of products. In addition, from time to time, the Company offers sales programs that...

  • 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
    ... quarter of 2010, the Company conducted its annual impairment test on its goodwill and intangible assets, including the trade names, trademarks and other intangible assets the Company acquired in 2003 as part of the acquisition of the assets of TFGC Estate, Inc. (f/k/a The Top-Flite Golf Company...

  • Page 44
    ... Financial Statements. Share-based Compensation The Company accounts for share-based compensation arrangements in accordance with ASC Topic 718, "Stock Compensation," which requires the measurement and recognition of compensation expense for all sharebased payment awards to employees and directors...

  • Page 45
    ..., LLC ("uPlay"), a developer and marketer of GPS devices that provide accurate on-course measurements 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...

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

  • Page 47
    ... in the golf industry, the Company's net sales in 2010 increased 2% compared to 2009, primarily as a result of favorable foreign currency rates, an overall increase in average selling prices, and increased sales in the Company's accessories and apparel businesses and new and emerging markets. These...

  • Page 48
    ... 2009(1) Growth (Decline) Dollars Percent Net sales Golf clubs ...Golf balls ... $791.2 176.5 $967.7 $772.3 178.5 $950.8 $18.9 (2.0) $16.9 2% (1)% 2% (1) Certain prior period costs associated with gift card promotions have been reclassified from accessories and other into the applicable product...

  • Page 49
    ... promotional activity on in-line products in 2010 compared to 2009; and (v) a favorable shift in golf ball production to more cost efficient regions outside the United States. These increases were partially offset by price reductions taken on older golf club products, charges related to the Company...

  • Page 50
    ... 31, 2010 2009(1) Growth (Decline) Dollars Percent Net sales: Woods ...Irons ...Putters ...Accessories and other ... $225.4 $222.6 223.8 232.9 106.2 98.1 235.8 218.7 $791.2 $772.3 $ 2.8 (9.1) 8.1 17.1 $18.9 1% (4)% 8% 8% 2% (1) Certain prior period costs associated with gift card promotions have...

  • Page 51
    ... in millions): Years Ended December 31, 2010 2009(1) Decline Percent Dollars Net sales: Golf balls ... $176.5 $178.5 $(2.0) (1)% (1) Certain prior period costs associated with gift card promotions have been reclassified from accessories and other into the applicable product categories to...

  • Page 52
    ...a decrease in golf club promotional activity in 2010 compared to 2009. These increases were partially offset by (i) price reductions taken on older club products in 2010; (ii) an unfavorable shift in product mix within irons products; (iii) charges related to the Company's Global Operations Strategy...

  • Page 53
    ...): Years Ended December 31, 2009(1) 2008 Decline Dollars Percent Net sales Golf clubs ...Golf balls ... $772.3 178.5 $950.8 $ 894.1 223.1 $1,117.2 $(121.8) (44.6) $(166.4) (14)% (20)% (15)% (1) Certain costs associated with gift card promotions have been reclassified from accessories and...

  • Page 54
    ... for the year ended December 31, 2008. As a percentage of sales, research and development expenses remained consistent at 3% during the twelve months ended December 31, 2009 and 2008. The increase was primarily due to an increase in employee costs as a result of the Company's entrance into the golf...

  • Page 55
    ...12 per share) related to costs associated with the implementation of the Company's gross margin improvement initiatives. Golf Clubs and Golf Balls Segments Results for the Years Ended December 31, 2009 and 2008 The overall decrease in net sales in 2009 was primarily due to the weak global economy as...

  • Page 56
    ... (dollars in millions): Years Ended December 31, 2009(1) 2008 Decline Dollars Percent Net sales: Golf balls ... $178.5 $223.1 $(44.6) (20)% (1) Certain costs associated with gift card promotions have been reclassified from accessories and other into the applicable product categories to conform...

  • Page 57
    ... expenses related to both the golf club and golf ball segments decreased during the twelve months ended December 31, 2009, compared to the same period in 2008 as a result of cost reductions taken by the Company, primarily related to advertising and promotional activities, employee costs, and...

  • Page 58
    ...the 2011 golf season compared to 2010, in addition to lower than anticipated sales on certain of the Company's older in-line golf products primarily due to the continued delay in the recovery of the golf industry in 2010. The Company expects to sell this inventory in the normal course of business in...

  • Page 59
    ...vesting and settlement of employee restricted stock unit awards. The Company's repurchases of shares of common stock are recorded at cost and result in a reduction of shareholders' equity. As of December 31, 2010, the Company remained authorized to repurchase up to an additional $75.2 million of its...

  • Page 60
    ...conditions of the preferred stock. These additional dividends are not reflected in this table. (3) The Company leases certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item represent commitments for minimum...

  • Page 61
    ... Note 7 "Business Acquisitions" to the Consolidated Financial Statements). As of December 31, 2010, based on the Company's preliminary assessment of certain performance indicators in connection with the sale of uPlay products, the probability of the Company fulfilling this additional purchase price...

  • Page 62
    ... respectively. At December 31, 2010 and 2009, there were no outstanding foreign exchange contracts designated as cash flow hedges for anticipated sales denominated in foreign currencies. As part of the Company's risk management procedure, a sensitivity analysis model is used to measure the potential...

  • Page 63
    ... as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010, together with the report of our independent registered public accounting firm, are included in this Annual Report on Form 10-K on pages F-1 through F-44. Item 9. None. Item 9A. Controls and...

  • Page 64
    ... deteriorate. The effectiveness of the Company's internal control over financial reporting as of December 31, 2010 has been audited by Deloitte & Touche LLP, the Company's independent registered public accounting firm, as stated in its report which is included herein. Item 9B. Other Information None...

  • Page 65
    ... 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, 2010, based on...

  • Page 66
    ... the number of stock options and shares underlying Restricted Stock Units (RSUs) outstanding and authorized for issuance under all equity compensation plans of the Company, and the number of shares that could be issued under the Company's Employee Stock Purchase Plan as of December 31, 2010. See...

  • Page 67
    ... the Promotion Plan, the Company granted stock options to golf professionals and other endorsers of the Company's products. Such grants were generally made at prices that were equal to the fair market value of the Company's common stock on the date of grant. Item 13. Certain Relationships, Related...

  • Page 68
    ... requests should be directed to the Company's Investor Relations Department at Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008. 3.1 3.2 Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, as filed with the...

  • Page 69
    ... 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Commission on February 27, 2009 (file no. 1-10962). Second Amendment to Officer Employment Agreement, effective as of April 30, 2010, by and between Callaway Golf Company and Steven C. McCracken...

  • Page 70
    ... 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Commission on February 27, 2009 (file no. 1-10962). Second Amendment to Officer Employment Agreement, effective as of April 30, 2010, by and between Callaway Golf Company and Thomas T. Yang...

  • Page 71
    ...2009 (file no. 1-10962). Callaway Golf Company 2009 Senior Management Incentive Program, incorporated herein by this reference to Exhibit 10.52 to the Company's Current Report on Form 8-K, as filed with the Commission on March 10, 2009 (file no. 1-10962). Callaway Golf Company 2010 Senior Management...

  • Page 72
    ... as of January 28, 2008 by and among Callaway Golf Company, Bank of America, N.A. (as Administrative Agent, Swing Line Lender and L/C Issuer) and certain other lenders named therein, incorporated herein by this reference to Exhibit 10.49 to the Company's Current Report on Form 8-K, as filed with the...

  • Page 73
    ... Fellows and Bradley J. Holiday pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†Included in this report 59

  • Page 74
    ... duly authorized. CALLAWAY GOLF COMPANY By: /s/ GEORGE FELLOWS George Fellows President and Chief Executive Officer Date: February 28, 2011 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 75
    ... period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report...

  • Page 76
    ... period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report...

  • Page 77
    ... 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, 2010, as filed with the Securities and Exchange Commission (the "10-K Report"), that: (1) the 10-K Report...

  • Page 78
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 79
    ... Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2010 and 2009 ...Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 ...Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009...

  • Page 80
    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, 2010 and 2009, ...

  • Page 81
    ... Trust held at market value, 291,341 shares and 983,275 shares at December 31, 2010 and 2009, respectively ...Less: Common stock held in treasury, at cost, 1,910,646 shares and 1,823,367 shares at December 31, 2010 and 2009, respectively ...Total Callaway Golf Company shareholders' equity ...Non...

  • Page 82
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2010 2009 2008 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Impairment charge ...

  • Page 83
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2010 2009 2008 Cash flows from operating activities: Net income (loss) ...Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ......

  • Page 84
    ... AND COMPREHENSIVE INCOME (LOSS) (In thousands) Callaway Golf Shareholders Accumulated Other Grantor Treasury Stock Preferred Stock Common Stock Additional Paid-in Unearned Retained Comprehensive Stock Non-controlling Shares Amount Shares Amount Capital Compensation Earnings Income (Loss) Trust...

  • Page 85
    ... on-course range finders, golf and lifestyle apparel, golf headwear, eyewear, golf towels and golf umbrellas. The Company generally sells its products to golf retailers (including pro shops at golf courses and off-course retailers), sporting goods retailers and mass merchants, directly and through...

  • Page 86
    ... use of uPro GPS on-course range finders are deferred when purchased and recognized when customers download the course credits for usage. Amounts billed to customers for shipping and handling are included in net sales and costs incurred related to shipping and handling are included in cost of sales...

  • Page 87
    ...in sales and in warranty return rates primarily due to improved durability of newer products combined with an increase in customer paid repairs. The following table provides a reconciliation of the activity related to the Company's reserve for warranty expense: Year Ended December 31, 2010 2009 2008...

  • Page 88
    ... is computed using the straight-line method over estimated useful lives as follows: Buildings and improvements ...Machinery and equipment ...Furniture, computers and equipment ...Production molds ...10-30 years 5-10 years 3-5 years 2-5 years Normal repairs and maintenance costs are expensed...

  • Page 89
    ... 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 90
    ... by the number of shares underlying the restricted stock awarded. Total compensation expense is recognized on a straight-line basis over the vesting period. Phantom Stock Units are a form of share-based awards that are indexed to the Company's stock and are settled in cash. They are accounted for as...

  • Page 91
    ... primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, GPS on-course range finders, other golf-related accessories and royalties from licensing of the Company's trademarks and service marks. The Golf Balls segment...

  • Page 92
    ..., which is designed to add speed and flexibility to customer service demands, optimize efficiencies, and facilitate long-term gross margin improvements, includes the reorganization of the Company's manufacturing and distribution centers located in Carlsbad, California, Toronto, Canada, and Chicopee...

  • Page 93
    ... 3,000 Golf Ball Manufacturing Consolidation In connection with the Company's gross margin improvement initiatives and its actions to 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...

  • Page 94
    ...and compliance with the Company's line of credit and applicable law. The preferred stock is generally convertible at any time at the holder's option into common stock of the Company at an initial conversion rate of 14.1844 shares of Callaway Golf's common stock per share of preferred stock, which is...

  • Page 95
    ..., Inc. (successor-in-interest to Golf Entertainment International Limited). As such, the Company will continue to account for its investment using the cost method under ASC Topic 325. In addition to the investment and loans referenced above, in April 2010 the Company entered into an arrangement to...

  • Page 96
    ..., LLC ("uPlay"), a developer and marketer of GPS devices that provide accurate on-course measurements 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...

  • Page 97
    ...is met, any such additional purchase price paid at the end of the three year period will be recorded as goodwill. The allocation of the aggregate acquisition costs is as follows (in thousands): Assets Acquired: Cash ...Accounts receivable ...Inventory ...Property, plant and equipment ...Database and...

  • Page 98
    ... classified as available for sale in the amount of $1,500,000 in 2010, and $1,890,000 in 2009, respectively. Property held for sale represents the net book value of the golf ball manufacturing facility in Gloversville, New York as the result of the Company's announcement in May 2008 to close this...

  • Page 99
    ...flows from the trade names and trademarks acquired as part of the Top-Flite acquisition, the Company considered the negative impact of a recent trend in the golf industry where premium branded competitor golf balls are now being sold through the sporting goods and mass market channels. This increase...

  • Page 100
    ... that the discounted expected cash flows from the trade names and trademarks associated with the Top-Flite acquisition was $7,547,000 less than the carrying value of those assets. As a result, the Company recorded an impairment charge of $7,547,000 during the fourth quarter of 2010, which was...

  • Page 101
    ... Company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815, and (c) how derivative instruments and related hedged items affect the Company's financial position, financial performance, and cash flows. In the normal course of business...

  • Page 102
    ... December 31, 2010, 2009 and 2008, the Company did not designate any foreign currency exchange contracts as derivatives that qualify for hedge accounting under ASC 815. At December 31, 2010, 2009 and 2008, the notional amounts of the Company's foreign currency exchange contracts used to hedge the...

  • Page 103
    ... market value of the Company's common stock at the end of the period. In June 2009, the Company completed its offering of 1,400,000 shares of convertible preferred stock. The preferred stock is generally convertible into shares of common stock and earns cumulative dividends from the date of original...

  • Page 104
    ... stock awards and units, stock option exercises and employee stock plan purchases. The existence of the GST will have no impact upon the amount of benefits or compensation that will be paid under the Company's employee benefit plans. The GST acquires, holds and distributes shares of the Company...

  • Page 105
    ... 2008: Year Ended December 31, 2010 2009 2008 (In thousands) Employee stock option exercises ...Employee restricted stock units vested ...Employee stock plan purchases ...Total shares released from the GST ... - 283 409 692 - 36 421 457 113 - 260 373 Note 14. Share-Based Compensation The Company...

  • Page 106
    ... relating to outstanding stock options for the years ended December 31, 2010, 2009 and 2008, 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-pricing model. The model...

  • Page 107
    ... Callaway Golf Company Grantor Stock Trust (see Note 13-Capital Stock). The tax deficit related to option exercises for the years ended December 31, 2010, 2009 and 2008 totaled approximately $564,000, $237,000 and $610,000, respectively. Restricted Stock, Restricted Stock Units and Performance Units...

  • Page 108
    ... recognized compensation expense of $737,000. There were no Performance Share Units granted in 2010 and 2009. The table below summarizes the total number of Restricted Stock Units granted to certain employee participants and directors during the years ended December 31, 2010, 2009 and 2008, as...

  • Page 109
    ... 31, 2010. As of December 31, 2009, the expense related to Phantom Stock Units was nominal. Employee Stock Purchase Plan Pursuant to the amended and restated Callaway Golf Employee Stock Purchase Plan (the "Plan"), participating employees authorize the Company to withhold compensation and to use the...

  • Page 110
    ... of service. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $5,431,000, $1,380,000 and $7,098,000 during 2010, 2009 and 2008, respectively. Additionally, the Company can make discretionary contributions based on the profitability of...

  • Page 111
    ... (in thousands): December 31, 2010 2009 Deferred tax assets: Reserves and allowances not currently deductible for tax purposes ...Basis difference related to fixed assets ...Compensation and benefits ...Basis difference for inventory valuation ...Compensatory stock options and rights ...Deferred...

  • Page 112
    ...'s operating losses in the United States do not recover and return to profitability as projected by management, the Company could be required to establish a non-cash valuation allowance against a portion or all of the U.S. deferred tax assets. At December 31, 2010, the Company recorded a non-cash...

  • Page 113
    ... 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 years ended December 31, 2010, 2009 and 2008, the Company recognized a net benefit of approximately $490,000, $190,000 and $195,000...

  • Page 114
    ...obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company. On February 9, 2006, Callaway Golf filed a complaint in the United States District Court in Delaware (Case No. C.A. 06-91) asserting patent infringement...

  • Page 115
    ...On March 3, 2009, Acushnet filed a complaint in the United States District Court for the District of Delaware, Case No. C.A. 09-130, asserting claims against the Company for patent infringement. Specifically, Acushnet asserts that the Company's sale of the Tour i and Tour ix golf balls infringe nine...

  • Page 116
    ... that Callaway Golf had not infringed the '303 patent. Inaba did not appeal the court's ruling and the matter is concluded. On January 19, 2009, the Company filed suit in the Superior Court for the County of San Diego, Case No. 37-2009-00050363-CU-BC-NC, against Corporate Trade International, Inc...

  • Page 117
    ... the years ended December 31, 2010, 2009 and 2008 was $13,967,000, $13,567,000 and $12,985,000, respectively. Unconditional Purchase Obligations During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production...

  • Page 118
    .... As of December 31, 2010, based on the Company's preliminary assessment of certain performance indicators in connection with the sale of uPlay products, the probability of the Company fulfilling this additional purchase price obligation at the end of the three year period ending December 31, 2011...

  • Page 119
    ... primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, GPS on-course range finders, other golfrelated accessories and royalties from licensing of the Company's trademarks and service marks. The golf balls segment...

  • Page 120
    ... to close this facility (see Note 3). The Company's net sales by product category are as follows: Year Ended December 31, 2010 2009(1) 2008 (In thousands) Net sales Drivers and Fairway Woods ...Irons ...Putters ...Golf Balls ...Accessories and Other ... $225,438 223,773 106,178 176,475 235,792 $967...

  • Page 121
    ... the product was shipped. Long-lived assets are based on location of domicile. Long-Lived Sales Assets (In thousands) 2010 United States ...Europe ...Japan ...Rest of Asia ...Other foreign countries ...2009 United States ...Europe ...Japan ...Rest of Asia ...Other foreign countries ...2008 United...

  • Page 122
    ...33) $ (0.54) $ (0.54) $ (0.46) (0.46) Total Fiscal Year 2009 Quarters 2nd 3rd 4th (In thousands, except per share data) Net sales ...Gross profit ...Net income (loss) ...Dividends on convertible preferred stock (Note 4) ...Net income (loss) allocable to common shareholders ...Earnings (loss) per...

  • Page 123
    SCHEDULE II CALLAWAY GOLF COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2010, 2009 and 2008 Allowance Allowance for for Sales Doubtful Returns Accounts (In thousands) Date Balance, December 31, 2007 ...$ 5,696 $ 7,990 Provision ...26,233 3,349 Write-off, ...

  • Page 124
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 125
    ... the energy used to manufacture McCoy is generated using Green-e certified renewable energy. • Financials Printed on: 35# Fraser Opaque, which is FSC®-certified, 10% post consumer recycled material. Products that come from FSC®-certified forests and are covered by a chain of custody certificate...

  • Page 126
    CALLAWAY GOLF COMPANY 218 0 Ruther ford Road Carl sbad , C A 92 0 0 8 -7328 www.call awaygolf.com