Callaway Golf Company 1998-1999

7/21/2019 Callaway Golf Company 1998-1999

1/46

CONSOLIDATED BALANCE SHEET

(in thousands, except shae and pe shae data! Dece"#e $%, %&&& %&&'

ASSETS

Cuent assets)

Cash and cash e*ui+aents - %%.,/0. - 12,/%'

Accounts ecei+a#e, net 21,.2. 3$,1//

In+entoies, net &3,&$' %1&,%&.

De4eed taxes $.,22' 2%,0.&

Othe cuent assets %$,%.. 1,$0%

Tota cuent assets $%0,13. $.$,/0/

Popet5, pant and e*uip"ent, net %1.,.%1 %3.,3&1

Intan6i#e assets, net %.0,%1$ %.3,33&

Othe assets 1$,&21 $%,/1'

- /%/,3'$ - /22,'.3

77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

LIABILITIES AND SHA8EHOLDE8S9 E:;IT

Cuent ia#iities)

Accounts pa5a#e and accued expenses - 1/,//1 - $2,&.'

Accued e"po5ee co"pensation and #ene4its .%,%./ %%,0'$

Accued =aant5 expense $/,%02 $2,'%2 Line o4 cedit 30,&%&

Note pa5a#e %.,&3%

Accued estuctuin6 costs %,$3& 3,$'&

Inco"e taxes pa5a#e &,&0$

Tota cuent ia#iities %02,.31 %'1,00'

Lon6te" ia#iities)


2/46

De4eed co"pensation %%,232 3,/0/

Accued estuctuin6 costs %%,%%3

Co""it"ents and contin6encies (Note %%!

Shaehodes9 e*uit5)

Pe4eed Stoc, -?0% pa +aue, $,000,000 shaes authoi@ed, none issued and

outstandin6 at Dece"#e $%, %&&& and %&&'

Co""on Stoc, -?0% pa +aue, .10,000,000 shaes authoi@ed, 3/,$0.,%&/ and

32,0&2,0'3 issued and outstandin6

at Dece"#e $%, %&&& and %&&' 3/$ 32%

Paidin capita $03,$.& .2',0%2

;neaned co"pensation (.,3'1! (2,/2$!

8etained eanin6s .'',0&0 .2.,2.'

Accu"uated othe co"pehensi+e inco"e .'0 %,3'0

Less) anto Stoc Tust (2,$00,000 shaes at Dece"#e $%, %&&&

and %&&'! at "aet (Note /! (&$,311! (21,$.2!

Tota shaehodes9 e*uit5 1&&,&$1 12$,0&/

- /%/,3'$ - /22,'.3

77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

See acco"pan5in6 notes to consoidated 4inancia state"ents?

CONSOLIDATED STATEENT O OPE8ATIONS

(in thousands, except pe shae data! ea ended Dece"#e $%, %&&& %&&'

%&&3

Net saes - 3%1,13% %00 - /&3,/.% %00 - '1.,&.3

%00


3/46

Cost o4 6oods sod $3/,102 2$ 10%,/03 2' 100,%.3

13

oss po4it $$',0// 13 .&/,0%1 1. 11.,'00

2$

Sein6 expenses %$%,'2' %' %13,0.. .% %.0,2'&

%1

enea and ad"inistati+e expenses &.,13' %$ &',01' %1 30,3.1

'

8eseach and de+eop"ent costs $1,00. 2 $/,'1' 2 $0,.&'

1

8estuctuin6 costs (Note %.! (2,'&1! (%! 21,.$2 '

Su"ito"o tansition costs (Note %2! 2,3%$ %

Liti6ation sette"ent %.,000

%

Inco"e (oss! 4o" opeations 3&,&0& %% (10,%$&! (/! .0&,%'&

.2

Inteest and othe inco"e, net (Note &! &,%'. $,&%% 1,2'/

Inteest expense ($,2&1! (.,/3%! (%0!

Inco"e (oss! #e4oe inco"e taxes '2,1&3 %. ($','&&! (/! .%$,3/2

.2Inco"e tax po+ision (#ene4it! $0,%32 (%.,$$2! '%,0/%

Net inco"e (oss! - 22,$.. ' (- ./,2/1! (1! - %$.,301

%/

777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

7777777777


4/46

Eanin6s (oss! pe co""on shae)

Basic - 0?3& (- 0?$'! - %?&1

Diuted - 0?3' (- 0?$'! - %?'2

Co""on e*ui+aent shaes)

Basic 30,$&3 /&,1/$ /',103 Diuted 3%,.%1 /&,1/$ 3%,/&'


CONSOLIDATED STATEENT O CASH LOFS

(in thousands! ea ended Dece"#e $%,

%&&& %&&' %&&3

Cash 4o=s 4o" opeatin6 acti+ities)

Net inco"e (oss! - 22,$.. (- ./,2/1! - %$.,301

AdGust"ents to econcie net inco"e (oss! to net

cash po+ided #5 opeatin6 acti+ities)

Depeciation and a"oti@ation $&,'33 $2,''2 %&,10'

Noncash co"pensation %,$&0 .,''3 .,01%

Tax #ene4it 4o" execise o4 stoc options .,$33 $,0/' .&,3'/

De4eed taxes &,&3% ($/,.$2! %,0$0

Noncash estuctuin6 costs (',/0&! .2,1&3

Loss on disposa o4 assets $%2 %,.&' .

Chan6es in assets and ia#iities, net o4 e44ects

4o" ac*uisitions) Accounts ecei+a#e, net %&,/&0 2%,232 ($/,&$/!

In+entoies, net 2%,0&. (1.,//2! /,.3%

Othe assets (%.,&//! (%.,%1&! (/,'%'!

Accounts pa5a#e and accued expenses %.,..2 (1,$23! %$,2.&

Accued e"po5ee co"pensation and #ene4its &,'32 ($,1%%! (.,1$3!

Accued =aant5 expense .'/ 3,3/0 32/

Inco"e taxes pa5a#e (%0,00%! &,/2. (.,/$/!

Accued estuctuin6 costs ($,13/! 3,$'&


5/46

De4eed co"pensation $,&/& (.&&! .,3&/

Accued estuctuin6 costs on6te" (2,01%! %%,%%3

Net cash po+ided #5 opeatin6 acti+ities %//,.&/ $0,11' %2&,1&/

Cash 4o=s 4o" in+estin6 acti+ities)

Capita expenditues (2/,.11! (/3,'2&! (/3,&$'!

Ac*uisitions, net o4 cash ac*uied (.,$'&! (%0,/3.! (%.&,.2/!

Poceeds 4o" sae o4 assets 2,0&2 $,1%3 3.

Net cash used in in+estin6 acti+ities (2$,2$'! (32,%%1! (%&3,%..!

Cash 4o=s 4o" 4inancin6 acti+ities)

Net (pa5"ents on! poceeds 4o" ine o4 cedit (30,&%&! 30,&%&

Poceeds 4o" note pa5a#e $2,3/% %.,&3%

Shotte" de#t etie"ent (%0,$3$!

Issuance o4 Co""on Stoc &,00& %0,$1$ .3,2$0

8etie"ent o4 Co""on Stoc (&%3! (2.,&'2!

Di+idends paid, net (%&,3/0! (%&,1'2! (%&,%.$!

Net cash (used in! po+ided #5 4inancin6 acti+ities (12,&0&! /$,12' (11,23'!

E44ect o4 exchan6e ate chan6es on cash %$2 /.. (1&!

Net incease (decease! in cash and cash e*ui+aents //,&'1 %&,1%1 ('.,.2$!

Cash and cash e*ui+aents at #e6innin6 o4 5ea 12,/%' ./,.01 %0',123

Cash and cash e*ui+aents at end o4 5ea - %%.,/0. - 12,/%' - ./,.01

7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

Suppe"enta discosues) Noncash 4inancin6 (Note 1! - 1',3$.

Cash paid 4o inteest and 4ees - $,/$3 - .,%/. - %0

Cash paid 4o inco"e taxes - $0,/30 - ',%/2 - 21,$2'



6/46

CONSOLIDATED STATEENT O SHA8EHOLDE8S9 E:;IT

(in thousands! Accu"uated

Cuent

Co""on Stoc Othe

ea9s

PaidIn ;neaned 8etained Co"pehensi+e

Co"pehensi+e

Shaes A"ount Capita Co"pensation Eanin6s Inco"e ST

Tota Inco"e

Baance, Dece"#e $%, %&&/ 3.,'22 -3.& -.3',//& -($,%02! - .$',%%$ - .$/ -(%2.,$32! -

$/.,./3

Execise o4 stoc options .,'33 .& .%,2.&

.%,22'

Tax #ene4it 4o" execise o4

stoc options .&,3'/

.&,3'/

Co"pensato5 stoc options .,2%% (130!.,01%

E"po5ee stoc puchase pan $3. 1 2,&/'

2,&3.

Stoc etie"ent (%,'2.! (%&! (2.,&//!

(2.,&'2!

Cash di+idends (.0,/03!

(.0,/03!


7/46

Di+idends on shaes hed #5 ST %,1'1

%,1'1

AdGust"ent o4 STshaes to

"aet +aue (%,0/0! %,0/0

E*uit5 adGust"ent 4o" 4oei6n cuenc5 tansation (3&2!

(3&2! - (3&2!

Net inco"e %$.,301

%$.,301 %$.,301

Baance, Dece"#e $%, %&&3 31,.2. 31$ $$3,10$ ($,232! .&',3.' (22&! (%2%,$%2!

1'%,1.2 - %$%,&0&

Execise o4 stoc options $&% 1 1,1$$

1,1$3


stoc options $,0/'

$,0/'

Issuance o4 8esticted

Co""on Stoc %$0 % 1,0.& (1,0$0!

Canceation o4 8esticted

Co""on Stoc (%&! (2&3! 2&3

Co"pensato5 stoc and

stoc options %,2$. %,$22

.,''3

E"po5ee stoc puchase pan $'/ 1 2,&0.2,&0/

Stoc etie"ent (12! (%! (3/2! (%2%!

(&%3!

Cash di+idends (.0,&/&!

(.0,&/&!


%,1'1

AdGust"ent o4 STshaes to


8/46

"aet +aue (&/,&&0! &/,&&0

E*uit5 adGust"ent 4o" 4oei6n

cuenc5 tansation .,$$&

.,$$& - .,$$&

Net oss (./,2/1!(./,2/1! (./,2/1!

Baance, Dece"#e $%, %&&' 32,0&2 32% .2',0%2 (2,/2$! .2.,2.' %,3'0 (21,$.2!

12$,0&/ - (.1,..2!

Execise o4 stoc options '2% ' 2,$/.

2,$30


stoc options .,$33

.,$33

Canceation o4 8esticted

Co""on Stoc (..! (/'1! /'1

Co"pensato5 stoc and

stoc options (3&2! .,%'2

%,$&0

E"po5ee stoc puchase pan $3' 1 $,/$2

$,/$&

Cash di+idends (.%,.11!

(.%,.11!


%,1'1AdGust"ent o4 STshaes to

"aet +aue $&,1%& ($&,1%&!

E*uit5 adGust"ent 4o" 4oei6n

cuenc5 tansation (%,200!

(%,200! - (%,200!

Net inco"e 22,$..

22,$.. 22,$..


9/46

Baance, Dece"#e $%, %&&& 3/,$0. -3/$ -$03,$.& -(.,3'1! -.'',0&0 - .'0 -(&$,311!

-1&&,&$1 - 2$,'..


NOTES TO CONSOLIDATED INANCIAL STATEENTS

NOTE %

THE COPAN

Caa=a5 o4 Co"pan5 (Caa=a5 o4 o the Co"pan5! =as incopoated in

Cai4onia in %&'. and =as eincopoated in Dea=ae in %&&&? The Co"pan5

desi6ns, de+eops, "anu4actues and "aets hi6h*uait5, inno+ati+e 6o4

cu#s? Caa=a5 o49s pi"a5 poducts 4o the peiods pesented incude

eat Bi6 Betha(8! Ha= E5e(8! Titaniu" eta Foods, Bi6 Betha(8!

Steehead(T! eta Foods, Bi66est Bi6 Betha(8! Titaniu" Di+es, eat Bi6

Betha(8! Titaniu" eta Foods, Bi6 Betha(8! eta Foods =ith the Fa

Bid(8! soepate, eat Bi6 Betha(8! Tun6sten InGected(T! Titaniu" Ions,

Bi6 Betha(8! %.(8! Ions, eat Bi6 Betha(8! Tun6sten?Titaniu"(T! Ions,

Bi6 Betha(8! Ions, Od5sse5(8! puttes and =ed6es and +aious othe puttes?

NOTE .SINIICANT ACCO;NTIN POLICIES

P8INCIPLES O CONSOLIDATION

The consoidated 4inancia state"ents 4o the peiods pesented incude the

accounts o4 the Co"pan5 and its su#sidiaies, Caa=a5 o4 Saes Co"pan5,

o4 undin6 Copoation (o4 undin6!, Caa=a5 o4 Ba Co"pan5,


10/46

Od5sse5 o4, Inc? (Od5sse5!, CJ, Inc?, AA"eican o4 LLC

(AA"eican!, Caa=a5 o4 edia Jentues (CJ!, Caa=a5 o4 Euope

Ltd?, Caa=a5 o4 Euope, S?A?, Caa=a5 o4 K?K? (4o"e5 na"ed E8C

Intenationa Co"pan5!, Caa=a5 o4 (e"an5! "#H, Caa=a5 o4 Canada

Ltd? and Caa=a5 o4 Koea, Ltd?? A si6ni4icant inteco"pan5 tansactions and #aances ha+e #een ei"inated? The Co"pan5 sod the #usiness

o4AA"eican in %&&' and its inteest in CJ in ach %&&& (Note %1!?

Caa=a5 o4 Euope, S?A? =as "e6ed =ith Caa=a5 o4 Euope Ltd? in %&&&

(Note %1!?

INANCIAL STATEENT P8EPA8ATION

The pepaation o4 4inancia state"ents in con4o"it5 =ith 6enea5 accepted

accountin6 pincipes e*uies "ana6e"ent to "ae esti"ates and assu"ptions

that a44ect the epoted a"ounts o4 assets and ia#iities and discosue o4

contin6ent assets and ia#iities at the date o4 the 4inancia state"ents and

the epoted a"ounts o4 e+enues and expenses duin6 the epotin6 peiod?

Exa"pes o4 such esti"ates incude po+isions 4o =aant5, uncoecti#e

accounts ecei+a#e, in+ento5 o#soescence and estuctuin6 costs (Note

%.!? Actua esuts coud di44e 4o" those esti"ates, =hich coud "ateia5

a44ect 4utue esuts o4 opeations?

8EJEN;E 8ECONITION

Saes ae eco6ni@ed at the ti"e 6oods ae shipped, net o4 an ao=ance 4o

saes etuns?

AI8 JAL;E O INANCIAL INST8;ENTS

The Co"pan59s 4inancia instu"ents consist o4 cash and cash e*ui+aents, tade ecei+a#es and pa5a#es, 4o=ad 4oei6n cuenc5 exchan6e contacts,

its e+o+in6 ine o4 cedit and note pa5a#e (Note 1! and its accounts

ecei+a#e secuiti@ation 4aciit5 (Note 2!? The ca5in6 a"ounts o4 these

instu"ents appoxi"ate 4ai +aue #ecause o4 thei shot "atuities and

+aia#e inteest ates?

ADJE8TISIN COSTS


11/46

The Co"pan5 ad+etises pi"ai5 thou6h tee+ision and pint "edia? The

Co"pan59s poic5 is to expense ad+etisin6 costs, incudin6 poduction costs,

as incued? Ad+etisin6 expenses 4o %&&&, %&&' and %&&3 =ee -./,.0.,000,

-$.,&11,000 and -.0,$.0,000 especti+e5?

O8EIN C;88ENC T8ANSLATION AND T8ANSACTIONS

The accounts o4 the Co"pan59s 4oei6n su#sidiaies ha+e #een tansated into

;nited States doas at appopiate ates o4 exchan6e? Cu"uati+e

tansation 6ains o osses ae ecoded as accu"uated othe co"pehensi+e

inco"e in shaehodes9 e*uit5? ains o osses esutin6 4o" 4oei6n

cuenc5 tansactions (tansactions deno"inated in a cuenc5 othe than the

entit59s oca cuenc5! ae incuded in the consoidated state"ent o4

opeations? The Co"pan5 ecoded tansaction osses o4 -3&$,000 in %&&&,

tansaction 6ains o4 -%,2&',000 in %&&' and tansaction osses o4 -&10,000 in

%&&3?

Duin6 %&&&, %&&' and %&&3, the Co"pan5 enteed into 4o=ad 4oei6n

cuenc5 exchan6e ate contacts to hed6e pa5"ents due on inteco"pan5

tansactions #5 cetain o4 its =ho5o=ned 4oei6n su#sidiaies? The Co"pan5

aso hed6ed cetain 5endeno"inated tansactions =ith its apanese

disti#uto? 8eai@ed and uneai@ed 6ains and osses on these contacts ae

ecoded in inco"e? The e44ect o4 this pactice is to "ini"i@e +aia#iit5 in

the Co"pan59s opeatin6 esuts aisin6 4o" 4oei6n exchan6e ate "o+e"ents?

The Co"pan5 does not en6a6e in 4oei6n cuenc5 specuation? These 4oei6n

exchan6e contacts 6enea5 do not su#Gect the Co"pan5 to is due to

exchan6e ate "o+e"ents #ecause 6ains and osses on these contacts o44set

osses and 6ains on the inteco"pan5 tansactions #ein6 hed6ed, and the

Co"pan5 does not en6a6e in hed6in6 contacts =hich exceed the a"ount o4 the

inteco"pan5 tansactions? At Dece"#e $%, %&&&, %&&' and %&&3, the Co"pan5 had appoxi"ate5 -3,%%3,000, -%%,21$,000 and -.,232,000, especti+e5, o4

4oei6n exchan6e contacts outstandin6? The contacts outstandin6 at

Dece"#e $%, %&&& "atue #et=een anua5 and une o4 .000? The Co"pan5 had

net eai@ed and uneai@ed 6ains on 4oei6n exchan6e contacts o4 -$2',000,

-23,000 and -./%,000 in %&&&, %&&' and %&&3, especti+e5?


12/46

In une %&&', the inancia Accountin6 Standads Boad (ASB! issued

State"ent o4 inancia Accountin6 Standads (SAS! No? %$$, Accountin6 4o

Dei+ati+e Instu"ents and Hed6in6 Acti+ities? This state"ent esta#ishes

accountin6 and epotin6 standads 4o dei+ati+e instu"ents and hed6in6

acti+ities and e*uies that an entit5 eco6ni@e a dei+ati+es as eithe

assets o ia#iities in the #aance sheet and "easue those instu"ents at

4ai +aue? Chan6es in the 4ai +aue o4 dei+ati+es ae ecoded each peiod

in inco"e o othe co"pehensi+e inco"e, dependin6 on =hethe the dei+ati+es

ae desi6nated as hed6es and, i4 so, the t5pes o4 hed6es? SAS No? %$$ is

e44ecti+e 4o a peiods #e6innin6 a4te une %2, .000M the Co"pan5 eected

to adopt ea5 SAS No? %$$ on anua5 %, %&&&?

Adoption o4 this state"ent did not si6ni4icant5 a44ect the =a5 in =hich

the Co"pan5 cuent5 accounts 4o dei+ati+es to hed6e pa5"ents due on

inteco"pan5 tansactions, as desci#ed a#o+e? Accodin65, no cu"uati+e

e44ect adGust"ents =ee "ade? Ho=e+e, the Co"pan5 expects that it aso "a5

hed6e anticipated tansactions deno"inated in 4oei6n cuencies usin6

4o=ad 4oei6n cuenc5 exchan6e ate contacts and put o ca options? The

4o=ad contacts used to hed6e anticipated tansactions =i #e ecoded as

eithe assets o ia#iities in the #aance sheet at 4ai +aue? ains and

osses on such contacts =i #e ecoded in othe co"pehensi+e inco"e and

=i #e ecoded in inco"e =hen the anticipated tansactions occu? The

ine44ecti+e potion o4 a hed6es =i #e eco6ni@ed in cuent peiod

eanin6s?

EA8NINS PE8 COON SHA8E

Basic eanin6s pe co""on shae is cacuated #5 di+idin6 net inco"e 4o the

peiod #5 the =ei6hteda+ea6e nu"#e o4 co""on shaes outstandin6 duin6 the

peiod? Diuted eanin6s pe co""on shae is cacuated #5 di+idin6 net inco"e 4o the peiod #5 the =ei6hteda+ea6e nu"#e o4 co""on shaes

outstandin6 duin6 the peiod, inceased #5 diuti+e potentia co""on shaes

(diuti+e secuities! that =ee outstandin6 duin6 the peiod? Diuti+e

secuities incude shaes o=ned #5 the Caa=a5 o4 Co"pan5 anto Stoc

Tust (Note /!, options issued pusuant to the Co"pan59s stoc option pans

(Note '!, potentia shaes eated to the E"po5ee Stoc Puchase Pan (Note

'! and i6hts to puchase pe4eed shaes unde the Caa=a5 o4 Co"pan5

Shaehode 8i6hts Pan (Note '!? Diuti+e secuities eated to the Caa=a5


13/46

o4 Co"pan5 anto Stoc Tust and the Co"pan59s stoc option pans ae

incuded in the cacuation o4 diuted eanin6s pe co""on shae usin6 the

teasu5 stoc "ethod? Diuti+e secuities eated to the E"po5ee Stoc

Puchase Pan ae cacuated #5 di+idin6 the a+ea6e =ithhodin6s duin6 the

peiod #5 '2 o4 the o=e o4 the o44ein6 peiod pice o the "aet +aue

at the end o4 the peiod? The diuti+e e44ect o4 i6hts to puchase pe4eed

shaes unde the Caa=a5 o4 Shaehode 8i6hts Pan ha+e not #een incuded

as diuti+e secuities #ecause the conditions necessa5 to cause these i6hts

to #e edee"ed =ee not "et? A econciiation o4 the nu"eatos and

deno"inatos o4 the #asic and diuted eanin6s pe co""on shae cacuations

4o the 5eas ended Dece"#e $%, %&&&, %&&' and %&&3 is pesented in Note 3?

CASH E:;IJALENTS

Cash e*ui+aents ae hi6h5 i*uid in+est"ents puchased =ith "atuities o4

thee "onths o ess?

INJENTO8IES

In+entoies ae +aued at the o=e o4 cost o "aet? Cost is dete"ined

usin6 the 4istin, 4istout (IO! "ethod?

P8OPE8T, PLANT AND E:;IPENT

Popet5, pant and e*uip"ent ae stated at cost ess accu"uated

depeciation? Depeciation is co"puted usin6 the stai6htine "ethod o+e

esti"ated use4u i+es o4 t=o to $0 5eas? The Co"pan59s popet5, pant and

e*uip"ent 6enea5 ae depeciated o+e the 4oo=in6 peiods)

Buidin6s and i"po+e"ents %0$0 5eas

achine5 and e*uip"ent 2%2 5eas

unitue, co"putes and e*uip"ent $2 5eas

Poduction "ods . 5eas

No"a epais and "aintenance ae expensed as incued? Expenditues that

"ateia5 incease +aues, chan6e capacities o extend use4u i+es ae


14/46

capitai@ed? 8epace"ents ae capitai@ed and the popet5, pant, and

e*uip"ent accounts ae eie+ed o4 the ite"s #ein6 epaced? The eated

costs and accu"uated depeciation o4 disposed assets ae ei"inated and an5

esutin6 6ain o oss on disposition is incuded in inco"e?

The Co"pan5 capitai@es cetain so4t=ae de+eop"ent and i"pe"entation

costs? De+eop"ent and i"pe"entation costs ae expensed unti "ana6e"ent has

dete"ined that the so4t=ae =i esut in po#a#e 4utue econo"ic #ene4it

and "ana6e"ent has co""itted to 4undin6 the poGect? Theea4te, a diect

extena i"pe"entation costs, as =e as puchased so4t=ae costs, ae

capitai@ed and a"oti@ed usin6 the stai6htine "ethod o+e the e"ainin6

esti"ated use4u i+es, not exceedin6 4i+e 5eas?


LONLIJED ASSETS

The Co"pan5 assesses potentia i"pai"ents o4 its on6i+ed assets =hen

thee is e+idence that e+ents o chan6es in cicu"stances ha+e "ade eco+e5

o4 the asset9s ca5in6 +aue unie5? An i"pai"ent oss =oud #e

eco6ni@ed =hen the su" o4 the expected 4utue net cash 4o=s is ess than

the ca5in6 a"ount o4 the asset? Duin6 the 4outh *uate o4 %&&', the

Co"pan5 i"pe"ented a estuctuin6 pan that incuded a nu"#e o4 cost

eduction actions and opeationa i"po+e"ents (Note %.!? As a esut o4 this

pan, i"pai"ent osses =ee ecoded in %&&' 4o cetain o4 the Co"pan59s

on6i+ed assets?

INTANIBLE ASSETS

Intan6i#e assets consist pi"ai5 o4 tade na"e, tade"a, tade dess,

patents and 6ood=i esutin6 4o" the puchase o4 su#stantia5 a o4 the

assets and cetain ia#iities o4 Od5sse5 Spots, Inc? and 6ood=i

associated =ith the puchase o4 cetain 4oei6n disti#utos (Note %1!?

Intan6i#e assets ae a"oti@ed usin6 the stai6htine "ethod o+e peiods

an6in6 4o" thee to 10 5eas? Duin6 %&&&, %&&' and %&&3, a"oti@ation o4

intan6i#e assets =as -3,13/,000, -2,1//,000 and -%,33',000 especti+e5?


15/46

STOCKBASED COPENSATION

The Co"pan5 "easues co"pensation expense 4o its stoc#ased e"po5ee

co"pensation a=ads usin6 the intinsic +aue "ethod? Po 4o"a discosues

o4 net inco"e and eanin6s pe shae, as i4 the 4ai +aue#ased "ethod had

#een appied in "easuin6 co"pensation expense, ae pesented in Note '?

Co"pensation expense 4o none"po5ee stoc#ased co"pensation a=ads is

"easued usin6 the 4ai+aue "ethod?

INCOE TAES

Cuent inco"e tax expense is the a"ount o4 inco"e taxes expected to #e

pa5a#e 4o the cuent 5ea? A de4eed inco"e tax asset o ia#iit5 is

esta#ished 4o the expected 4utue conse*uences esutin6 4o" di44eences

in the 4inancia epotin6 and tax #ases o4 assets and ia#iities? De4eed

inco"e tax expense (#ene4it! is the net chan6e duin6 the 5ea in the

de4eed inco"e tax asset o ia#iit5?

De4eed taxes ha+e not #een po+ided on the cu"uati+e undisti#uted

eanin6s o4 4oei6n su#sidiaies since such a"ounts ae expected to #e

ein+ested inde4inite5? The Co"pan5 po+ides a +auation ao=ance 4o its

de4eed tax assets =hen, in the opinion o4 "ana6e"ent, it is "oe ie5

than not that such assets =i not #e eai@ed?

COP8EHENSIJE INCOE

SAS No? %$0, 8epotin6 Co"pehensi+e Inco"e, e*uies that a co"ponents

o4 co"pehensi+e inco"e #e epoted in the 4inancia state"ents in the peiod

in =hich the5 ae eco6ni@ed? The co"ponents o4 co"pehensi+e inco"e 4o the

Co"pan5 incude net inco"e and 4oei6n cuenc5 tansation adGust"ents? Since the Co"pan5 has "et the inde4inite e+esa citeion, it does not

accue inco"e taxes on 4oei6n cuenc5 tansation adGust"ents?

SEENT INO8ATION

In %&&', the Co"pan5 adopted SAS No? %$%, Dicosues a#out Se6"ents o4 an

Entepise and 8eated In4o"ation? SAS No? %$% supesedes SAS No? %1,

inancia 8epotin6 4o Se6"ents o4 a Business Entepise, epacin6 the


16/46

indust5 se6"ent appoach =ith the "ana6e"ent appoach? The "ana6e"ent

appoach desi6nates the intenationa o6ani@ation that is used #5 "ana6e"ent

4o "ain6 opeatin6 decisions and assessin6 pe4o"ance as the souce o4 the

Co"pan59s epota#e se6"ents? SAS No? %$% aso e*uies discosues a#out

poducts and se+ices, 6eo6aphic aeas and "aGo custo"es? The adoption o4

this standad did not a44ect the Co"pan59s esuts o4 opeations, 4inancia

position o cash 4o=s? This in4o"ation is pesented in Note %2?

DIJE8SIICATION O C8EDIT 8ISK

The Co"pan59s 4inancia instu"ents that ae su#Gect to concentations o4

cedit is consist pi"ai5 o4 cash e*ui+aents and tade ecei+a#es?

The Co"pan5 "a5 in+est its excess cash in "one5 "aet accounts and ;?S?

o+en"ent secuities and has esta#ished 6uideines eati+e to

di+esi4ication and "atuities in an e44ot to "aintain sa4et5 and i*uidit5?

These 6uideines ae peiodica5 e+ie=ed and "odi4ied to tae ad+anta6e o4

tends in 5ieds and inteest ates? Duin6 %&&& and %&&', no in+est"ents in ;?S? o+en"ent secuities =ee hed?

The Co"pan5 opeates in the 6o4 e*uip"ent indust5 and pi"ai5 ses

its poducts to 6o4 e*uip"ent etaies and 4oei6n disti#utos? The

Co"pan5 pe4o"s on6oin6 cedit e+auations o4 its custo"es94inancia

condition and 6enea5 e*uies no coatea 4o" these custo"es? The

Co"pan5 "aintains ese+es 4o potentia cedit osses, =hich it consides

ade*uate to co+e an5 such osses?

Duin6 %&&&, %&&', and %&&3, appoxi"ate5 1., $' and $2, especti+e5,

o4 the Co"pan59s net saes =ee "ade to 4oei6n custo"es? An ad+ese chan6e

in eithe econo"ic conditions a#oad o the Co"pan59s eationship =ith si6ni4icant disti#utos coud ne6ati+e5 i"pact the +ou"e o4 the Co"pan59s

intenationa saes and the Co"pan59s esuts o4 opeations, cash 4o=s and

4inancia position?

8ECLASSIICATIONS

Cetain pio peiod a"ounts ha+e #een ecassi4ied to con4o" =ith the

cuent peiod pesentation?


17/46

NOTE $

SELECTED INANCIAL STATEENT INO8ATION

(in thousands! Dece"#e $%,

%&&& %&&'

Cash and cash e*ui+aents)

Cash, inteest #eain6 - %%0,%23 - 1%,/'&

Cash, noninteest #eain6 .,112 $,&.&

- %%.,/0. - 12,/%'

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Accounts ecei+a#e, net)

Tade accounts ecei+a#e - 2&,21$ - '$,102

Ao=ance 4o dou#t4u accounts (2,.&%! (&,&$&!

- 21,.2. - 3$,1//

77777777777777777777777777777777777777777777777777777777777777777777777777777777

In+entoies, net)

8a= "ateias - 12,'/' - %0.,$2.

Foinpocess %,10$ %,'.0

inished 6oods /2,//% '%,'/'

%%.,&$. %'/,010

8ese+e 4o o#soescence (%1,&&1! ($/,'1'!

- &3,&$' - %1&,%&.

77777777777777777777777777777777777777777777777777777777777777777777777777777777Popet5, pant and e*uip"ent, net)

Land - %.,$2' - %$,$32

Buidin6s and i"po+e"ents '3,&%0 22,$03

achine5 and e*uip"ent 20,&1. 23,$$1

unitue, co"putes and e*uip"ent /1,$$1 22,/.&

Poduction "ods ..,3%1 %3,13.

Constuctioninpocess 2,0$. 2.,&.0


18/46

.1$,.&0 .2.,0$3

Accu"uated depeciation (%0%,03/! (3&,.1$!

- %1.,.%1 - %3.,3&1

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Intan6i#e assets)

Tade na"e - /&,/.& - /&,/.&

Tade"a and tade dess .&,'1% .&,'1%

Patents, 6ood=i and othe $1,&%% $2,3/2

%$1,$'% %$2,.$2

Accu"uated a"oti@ation (%1,.$'! (3,12/!

- %.0,%1$ - %.3,33&

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Accounts pa5a#e and accued expenses)

Accounts pa5a#e - %%,.&3 - %0,$1%

Note to eated pat5 (Note %/! /,3// Accued expenses $2,$/3 %','.%

- 1/,//1 - $2,&.'

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Accued e"po5ee co"pensation and #ene4its)

Accued pa5o and taxes - %2,$0$ - /,%3'

Accued +acation and sic pa5 1,23% 1,1.$

Accued co""issions %,.2. 1'.

- .%,%./ - %%,0'$

77777777777777777777777777777777777777777777777777777777777777777777777777777777

NOTE 1

BANK LINE O C8EDIT AND NOTE PAABLE

On e#ua5 %., %&&&, the Co"pan5 consu""ated the a"end"ent o4 its cedit

4aciit5 to incease the 4aciit5 to up to -%.0,000,000 (the A"ended Cedit

A6ee"ent!? The A"ended Cedit A6ee"ent has a 4i+e5ea te" and is secued

#5 su#stantia5 a o4 the assets o4 the Co"pan5? The A"ended Cedit


19/46

A6ee"ent #eas inteest at the Co"pan59s eection at the London Inte#an

O44ein6 8ate (LIBO8! pus a "a6in o the hi6he o4 the #ase ate on

copoate oans at a6e ;?S? "one5 cente co""ecia #ans (pi"e ate! o

the edea unds 8ate pus 20 #asis points? The ine o4 cedit e*uies the

Co"pan5 to "aintain cetain "ini"u" 4inancia atios, incudin6 a 4ixed

cha6e co+ea6e atio, as =e as othe esticti+e co+enants? As o4 Dece"#e

$%, %&&&, up to -%%2,3$&,000 o4 the cedit 4aciit5 e"ained a+aia#e 4o

#oo=in6s (incudin6 a eduction o4 -1,./%,000 4o outstandin6 ettes o4

cedit!, su#Gect to "eetin6 cetain a+aia#iit5 e*uie"ents unde a

#oo=in6 #ase 4o"ua and othe i"itations?

On Dece"#e $0, %&&', Caa=a5 o4 Ba Co"pan5, a =ho5o=ned

su#sidia5 o4 the Co"pan5, enteed into a "aste ease a6ee"ent 4o the

ac*uisition and ease o4 up to -2/,000,000 o4 "achine5 and e*uip"ent? As o4

Dece"#e $%, %&&&, the Co"pan5 had 4inai@ed its ease po6a" and eased

-20,000,000 o4 e*uip"ent pusuant to the "aste ease a6ee"ent? This ease

po6a" incudes a intei" 4inance a6ee"ent (the inance A6ee"ent!? The

inance A6ee"ent po+ides peease 4inancin6 ad+ances 4o the ac*uisition and instaation costs o4 the a4oe"entioned "achine5 and e*uip"ent? The

inance A6ee"ent #eas inteest at LIBO8 pus a "a6in and is secued #5 the

unde5in6 "achine5 and e*uip"ent and a copoate 6uaantee 4o" the

Co"pan5? Duin6 the thid and 4outh *uates o4 %&&&, the Co"pan5 con+eted

the #aance o4 this note pa5a#e to the opeatin6 ease discussed a#o+e? As

o4 Dece"#e $%, %&&&, no a"ount =as outstandin6 unde this 4aciit5?

NOTE 2

ACCO;NTS 8ECEIJABLE SEC;8ITIATION

The Co"pan59s =ho5o=ned su#sidia5, Caa=a5 o4 Saes Co"pan5, ses

tade ecei+a#es on an on6oin6 #asis to its =ho5o=ned su#sidia5, o4

undin6? Pusuant to an a6ee"ent e44ecti+e e#ua5 %., %&&& =ith a

secuiti@ation co"pan5 (the Accounts 8ecei+a#e aciit5!, o4 undin6, in

tun, ses such ecei+a#es to the secuiti@ation co"pan5 on an on6oin6

#asis, =hich 5ieds poceeds o4 up to -'0?0 "iion at an5 point in ti"e?

o4 undin69s soe #usiness is the puchase o4 tade ecei+a#es 4o"

Caa=a5 o4 Saes Co"pan5? o4 undin6 is a sepaate copoate entit5 =ith


20/46

its o=n sepaate ceditos, =hich in the e+ent o4 its i*uidation =i #e

entited to #e satis4ied out o4 o4 undin69s assets pio to an5 +aue in

o4 undin6 #eco"in6 a+aia#e to the Co"pan5? The Accounts 8ecei+a#e

aciit5 expies in e#ua5 .001?

;nde the Accounts 8ecei+a#e aciit5, the ecei+a#es ae sod at 4ace

+aue =ith pa5"ent o4 a potion o4 the puchase pice #ein6 de4eed? As o4

Dece"#e $%, %&&&, no a"ount =as outstandin6 unde the Accounts 8ecei+a#e

aciit5? ees incued in connection =ith the sae o4 accounts ecei+a#e

4o 5ea ended Dece"#e $%, %&&& =ee -&.$,000 and =ee ecoded as inteest

expense?

NOTE /

8ANTO8 STOCK T8;ST

In u5 %&&2, the Co"pan5 esta#ished the Caa=a5 o4 Co"pan5 anto Stoc

Tust (the ST!? In conGunction =ith the 4o"ation o4 the ST, the Co"pan5 sod 1,000,000 shaes o4 ne=5 issued Co""on Stoc to the STat a puchase

pice o4 -/0,232,000 (-%2?%1 pe shae!? In Dece"#e %&&2, the Co"pan5 sod

an additiona %,$00,000 shaes o4 ne=5 issued Co""on Stoc to the STat a

puchase pice o4 -./,./$,000 (-.0?.0 pe shae!? The sae o4 these shaes

had no net i"pact on shaehodes9e*uit5? Duin6 the te" o4 the ST, shaes

in the ST"a5 #e used to 4und the Co"pan59s o#i6ations =ith espect to one

o "oe o4 the Co"pan59s non *uai4ied o *uai4ied e"po5ee #ene4it pans?

Shaes o=ned #5 the ST ae accounted 4o as a eduction to

shaehodes9e*uit5 unti used in connection =ith e"po5ee #ene4its? Each

peiod, the shaes o=ned #5 the ST ae +aued at the cosin6 "aet pice,

=ith coespondin6 chan6es in the ST#aance e4ected in capita in excess o4 pa +aue?

NOTE 3

EA8NINS PE8 COON SHA8E

The schedue #eo= su""ai@es the ee"ents incuded in the cacuation o4

#asic and diuted eanin6s (oss! pe co""on shae 4o the 5eas ended


21/46

Dece"#e $%, %&&&, %&&' and %&&3?

o the 5eas ended Dece"#e $%, %&&& and %&&3, %0,&3&,000 and &%3,000

options, especti+e5, =ee excuded 4o" the cacuations, as thei e44ect

=oud ha+e #een antidiuti+e? o the 5ea ended Dece"#e $%, %&&', a

diuti+e secuities =ee excuded 4o" the cacuation o4 diuted oss pe

shae, as thei e44ect =oud ha+e #een antiduuti+e?

(in thousands, except pe shae data! ea ended Dece"#e $%,

%&&& %&&' %&&3

Net inco"e (oss! -22,$.. (-./,2/1! -%$.,301

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Fei6hteda+ea6e shaes outstandin6)

Fei6hteda+ea6e shaes outstandin6 Basic 30,$&3 /&,1/$ /',103

Diuti+e secuities '%3 $,.&%

Fei6hteda+ea6e shaes outstandin6 Diuted 3%,.%1 /&,1/$ 3%,/&'77777777777777777777777777777777777777777777777777777777777777777777777777777777

Eanin6s (oss! pe co""on shae)

Basic - 0?3& (- 0?$'! - %?&1

Diuted - 0?3' (- 0?$'! - %?'2

NOTE '

STOCK OPTIONS AND 8IHTS

The Co"pan5 had the 4oo=in6 4ixed stoc option pans, unde =hich shaes =ee a+aia#e 4o 6ant at Dece"#e $%, %&&&) the %&&% Stoc Incenti+e Pan

(the %&&% Pan!, the %&&2 E"po5ee Stoc Incenti+e Pan (the %&&2 Pan!,

the %&&/ Stoc Option Pan (the %&&/ Pan!, the %&&' Stoc Incenti+e Pan

(the %&&' Pan!, the Po"otion, aetin6 and Endose"ent Stoc Incenti+e

Pan (the Po"otion Pan! and the NonE"po5ee Diectos Stoc Option Pan

(the Diectos Pan!?

The %&&% Pan, the %&&/ Pan and the %&&' Pan pe"it the 6antin6 o4


22/46

options o othe stoc a=ads to the Co"pan59s o44ices, e"po5ees and

consutants? ;nde the %&&% Pan, option pices "a5 #e ess than the "aet

+aue at the date o4 6ant, =hie unde the %&&/ Pan and the %&&' Pan

options "a5 not #e 6anted at option pices that ae ess than 4ai "aet

+aue at the date o4 6ant? The %&&2 Pan pe"its the 6antin6 o4 options o

othe stoc a=ads to on5 e"po5ees and consutants o4 the Co"pan5 at option

pices that "a5 #e ess than "aet +aue at the date o4 6ant? The %&&2 Pan

=as a"ended in %&&& to incease the "axi"u" nu"#e o4 shaes o4 Co""on Stoc

to #e issued upon execise o4 an option to 3,%00,000 shaes?

Duin6 %&&/ and %&&2, the Co"pan5 6anted options to puchase shaes to

t=o e5 o44ices, unde sepaate pans, in conGunction =ith te"s o4 thei

initia e"po5"ent (the Ke5 O44ice Pans!? The %&&0 A"ended and 8estated

Stoc Option Pan (the %&&0 Pan! pe"itted the 6antin6 o4 options to

o44ices, e"po5ees and consutants? No shaes ae a+aia#e 4o 6ant unde

the Ke5 O44ice Pans o the %&&0 Pan?

;nde the Po"otion Pan, shaes o4 Co""on Stoc "a5 #e 6anted in the 4o" o4 options o othe stoc a=ads to 6o4 po4essionas and othe

endoses at pices that "a5 #e ess than the "aet +aue o4 the stoc at

the 6ant date? The Diectos Pan pe"its the 6antin6 o4 options to

puchase shaes o4 Co""on Stoc to Diectos o4 the Co"pan5 =ho ae not

e"po5ees, at pices #ased on a nondiscetiona5 4o"ua, =hich "a5 not #e

ess than the "aet +aue o4 the stoc at the date o4 6ant?

The 4oo=in6 ta#e pesents shaes authoi@ed, a+aia#e 4o 4utue 6ant

and outstandin6 unde each o4 the Co"pan59s pans as o4 Dece"#e $%, %&&&)

(in thousands!

Pan Authoi@ed A+aia#e Outstandin6

%&&0 Pan 1,&.0 %00

%&&% Pan %0,000 %'' .,/&$

Po"otion Pan $,2/0 '3& %,00/

%&&2 Pan 3,%00 %,/13 2,.1&

%&&/ Pan /,000 232 2,$&2

%&&' Pan 200 200

Ke5 O44ice Pans %,%00 '.0


23/46

Diectos Pan '10 /1 1'1

Tota $1,0.0 $,'2$ %2,313

77777777777777777777777777777777777777777777777777777777777777777777777777777777

;nde the Co"pan59s stoc option pans, outstandin6 options +est o+e

peiods an6in6 4o" @eo to 4i+e 5eas 4o" the 6ant date and expie up to

ten 5eas a4te the 6ant date?


The 4oo=in6 su""ai@es stoc option tansactions 4o the 5eas ended

Dece"#e $%, %&&&, %&&' and %&&3)

(in thousands, except pe shae data! ea ended Dece"#e $%,

%&&& %&&' %&&3

Fei6hted Fei6hted Fei6hted

A+ea6e A+ea6e A+ea6e

Execise Execise Execise

Shaes Pice Shaes Pice Shaes Pice

Outstandin6 at #e6innin6 o4 5ea %$,/$3 -..?/. %%,.23 -..?1% %0,'00 -%2?0$

anted 1,0%. -%%?$0 1,0.0 -.2?01 $,10/ -$$?3&

Execised ('2%! - /?10 (11%! -%0?%/ (.,'33! - 3?'%

Canceed (%,02%! -.1?&2 (%,%&&! -$1?'/ (3.! -.'?'%

Outstandin6 at end o4 5ea %2,313 -.0?1/ %$,/$3 -..?/. %%,.23 -..?1%

Options execisa#e at end o4 5ea %%,0// -%'?/1 /,0$& -%3?3' $,12$ -%.?%3

Pice an6e o4 outstandin6 options -0?11-10?00 -0?11-10 -0?11-10?00

77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

The 4oo=in6 ta#es su""ai@e additiona in4o"ation a#out outstandin6


24/46

stoc options at Dece"#e $%, %&&& and options and othe stoc a=ads 6anted

duin6 %&&&)

OPTIONS O;TSTANDIN AND EE8CISABLE B P8ICE 8ANE AS O DECEBE8 $%, %&&&)

Fei6hted

A+ea6e Fei6hted

Nu"#e 8e"ainin6 Fei6hted A+ea6e

8an6e o4 Outstandin6 Contactua A+ea6e Nu"#e Execise Pice

Execise Pices (in thousands! Li4eeas Execise Pice Execisa#e (in thousands!

-0 -%0 3/. .?.% - $?%3 31. - $?0%

-%0 -%2 2,.&1 $?&. -%%?21 1,'1% -%0?21

-%2 -.2 .,/1. 1?32 -%'?2. %,/1$ -%'?32

-.2 -10 3,01& 2?1% -.&?32 $,'10 -$0?23

-0 -10 %2,313 1?/1 -.0?1/ %%,0// -%'?/1

7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

OPTIONS AND OTHE8 STOCK AFA8DS 8ANTED D;8IN %&&&)

Fei6hted

Nu"#e A+ea6e

(in thousands! Execise Pice

Execise pice 7 "aet +aue $,&.% - %%?%/

Execise pice (6eate than! "aet +aue '0 - %'?'' Execise pice (ess than! "aet +aue %% - '?2/

1,0%. - %%?$0

77777777777777777777777777777777777777777777777777777777777777777777777777777

Duin6 %&&&, the Co"pan5, at its discetion, extended the expiation te"s

o4 %,2$.,000 options hed #5 cetain e"po5ees and o44ices? At the ti"e o4


25/46

"odi4ication, the execise pices o4 the options =ee in excess o4 the then

cuent "aet pice and accodin65 this action did not esut in

co"pensation expense 4o the Co"pan5?

Duin6 %&&', the Co"pan5 "odi4ied cetain te"s o4 3.0,000 options hed #5

diectos, cetain o44ices and e"po5ees? These "odi4ications, =hich a6e5

esuted 4o" the Co"pan59s estuctuin6 pan, incuded acceeation o4

+estin6 and extension o4 expiation te"s at the Co"pan59s discetion? At the

ti"e o4 "odi4ication, the execise pices o4 the options =ee in excess o4

the then cuent "aet pice and accodin65 this action did not esut in

co"pensation expense 4o the Co"pan5?

Aso duin6 %&&', the Co"pan5 canceed %20,000 options hed #5

none"po5ees =ith option pices in excess o4 the thencuent "aet pice

o4 the Co"pan59s stoc? The Co"pan5 then eissued an e*ui+aent nu"#e o4

options to these non e"po5ees at the thencuent "aet pice and extended

cetain expiation te"s, and ecoded the eated co"pensation expense o4

-3%,000? An additiona -%&2,000 =as ecoded in uneaned co"pensation, and is #ein6 a"oti@ed o+e the e"ainin6 +estin6 peiods?

8IHTS

The Co"pan5 has 6anted o44ices, consutants, and e"po5ees i6hts to

ecei+e an a66e6ate o4 './,'00 shaes o4 Co""on Stoc 4o se+ices o othe

consideation? Duin6 %&&', '0,000 i6hts =ee execised =hie none =ee

6anted? No i6hts =ee 6anted o execised duin6 %&&& o %&&3? At Dece"#e

$%, %&&&, no i6hts to ecei+e shaes o4 Co""on Stoc e"ained outstandin6?

The Co"pan5 has a pan to potect shaehodes9 i6hts in the e+ent o4 a

poposed taeo+e o4 the Co"pan5? ;nde the pan, each shae o4 the Co"pan59s outstandin6 Co""on Stoc caies one i6ht to puchase one onethousandth o4

a shae o4 the Co"pan59s Seies A unio Paticipatin6 Pe4eed Stoc (the

8i6ht!? The 8i6ht entites the hode, unde cetain cicu"stances, to

puchase Co""on Stoc o4 Caa=a5 o4 Co"pan5 o o4 the ac*uiin6 co"pan5 at

a su#stantia5 discounted pice ten da5s a4te a peson o 6oup pu#ic5

announces it has ac*uied o has tendeed an o44e 4o %2 o "oe o4 the

Co"pan59s outstandin6 Co""on Stoc? The 8i6hts ae edee"a#e #5 the Co"pan5

at -?0% pe 8i6ht and expie in .002?


26/46

8EST8ICTED COON STOCK

Duin6 %&&', the Co"pan5 6anted %$0,000 shaes o4 8esticted Co""on Stoc to

./ o44ices o4 the Co"pan5? O4 these shaes, 1%,.20 shaes ha+e #een canceed

due to the se+ice e*uie"ent not #ein6 "et? The shaes, =hich ae

esticted as to sae o tans4e unti +estin6, =i +est on anua5 %,

.00$? The eated net co"pensation expense o4 -.,32%,000 is #ein6 eco6ni@ed

ata#5 o+e the +estin6 peiod, #ased on the di44eence #et=een the execise

pice and "aet +aue o4 the stoc on the "easue"ent date?

EPLOEE STOCK P;8CHASE PLAN

The Co"pan5 has an E"po5ee Stoc Puchase Pan (ESPP! =hee#5 ei6i#e

e"po5ees "a5 puchase shaes o4 Co""on Stoc at '2 o4 the o=e o4 the 4ai

"aet +aue on the 4ist da5 o4 a t=o 5ea o44ein6 peiod o the ast da5

o4 each six "onth execise peiod? E"po5ees "a5 authoi@e the Co"pan5 to

=ithhod co"pensation duin6 an5 o44ein6 peiod, su#Gect to cetain i"itations? Duin6 %&&3, the ESPP =as a"ended to incease the "axi"u" nu"#e

o4 shaes o4 the Co"pan59s Co""on Stoc that e"po5ees "a5 ac*uie unde this

pan to %,200,000 shaes? Duin6 %&&&, %&&' and %&&3, the ESPP puchased

appoxi"ate5 $3',000, $'/,000 and $3.,000 shaes, especti+e5, o4 the

Co"pan59s Co""on Stoc? As o4 Dece"#e $%, %&&&, %&2,000 shaes =ee ese+ed

4o 4utue issuance and =i #e puchased on the anua5 $%, .000 execise

peiod, esutin6 in the te"ination o4 the ESPP?

In a5 %&&&, the Co"pan59s shaehodes appo+ed a ne= ESPP(the %&&&

ESPP! =ith su#stantia5 the sa"e te"s as the ESPP? Thee ae .,000,000

shaes ese+ed 4o issuance unde the %&&& ESPP? This pan =i #e e44ecti+e

e#ua5 %, .000 upon the te"ination o4 the ESPP?

COPENSATION EPENSE

Duin6 %&&&, %&&', and %&&3, the Co"pan5 ecoded -%,$30,000, -.,$.%,000 and

-.,01%,000, especti+e5, in co"pensation expense 4o 8esticted Co""on Stoc

and cetain options to puchase shaes o4 Co""on Stoc 6anted to e"po5ees,

o44ices and consutants o4 the Co"pan5? The +auation o4 options 6anted to

none"po5ees is esti"ated usin6 the BacSchoes option picin6 "ode?


27/46

;neaned co"pensation has #een cha6ed 4o the +aue o4 options 6anted to

#oth e"po5ees and none"po5ees on the "easue"ent date #ased on the

+auation "ethods desci#ed a#o+e? These a"ounts ae a"oti@ed o+e the

+estin6 peiod? The una"oti@ed potion o4 uneaned co"pensation is sho=n as

a eduction o4 shaehodes9 e*uit5 in the acco"pan5in6 consoidated #aance

sheet?


P8O O8A DISCLOS;8ES

I4 the Co"pan5 had eected to eco6ni@e co"pensation expense #ased upon the

4ai +aue at the 6ant date 4o e"po5ee a=ads unde these pans, the

Co"pan59s net inco"e (oss! and eanin6s (oss! pe shae =oud #e chan6ed to

the po 4o"a a"ounts indicated #eo=)

(in thousands, except ea ended Dece"#e $%,

pe shae data! %&&& %&&' %&&3

Net inco"e (oss!)

As epoted - 22,$.. (-./,2/1! - %$.,301

Po 4o"a - $1,1.. (-1/,'13! - %.1,&3'

Eanin6s (oss! pe

co""on shae)

As epoted

Basic - 0?3& (-0?$'! - %?&1

Diuted - 0?3' (-0?$'! - %?'2

Po 4o"a Basic - 0?1& (-0?/3! - %?'$

Diuted - 0?1' (-0?/3! - %?33

777777777777777777777777777777777777777777777777777777777777777777777777777777

The po 4o"a a"ounts e4ected a#o+e "a5 not #e epesentati+e o4 4utue

discosues since the esti"ated 4ai +aue o4 stoc options is a"oti@ed to

expense as the options +est and additiona options "a5 #e 6anted in 4utue

5eas? The 4ai +aue o4 e"po5ee stoc options =as esti"ated at the date o4


28/46

6ant usin6 the BacSchoes option picin6 "ode =ith the 4oo=in6

assu"ptions 4o the 5eas ended Dece"#e $%, %&&&, %&&', and %&&3,

especti+e5)

ea ended Dece"#e $%,

%&&& %&&' %&&3

Di+idend 5ied %?1 %?& 0?&

Expected +oatiit5 12?/ 1.?0 $%?2

8is 4ee inteest ates 2?$//?.1 1?//1?3. 2?/12?'&

Expected i+es $1 5eas $/ 5eas $/ 5eas

777777777777777777777777777777777777777777777777777777777777777777777777777777

The =ei6hteda+ea6e 6antdate 4ai +aue o4 options 6anted duin6 %&&&

=as -$?23 pe shae? The BacSchoes option +auation "ode =as de+eoped

4o use in esti"atin6 the 4ai +aue o4 taded options =hich ha+e no +estin6

estictions and ae 4u5 tans4ea#e? In addition, option +auation "odes

e*uie the input o4 hi6h5 su#Gecti+e assu"ptions incudin6 the expected stoc pice +oatiit5? Because the Co"pan59s e"po5ee stoc options ha+e

chaacteistics si6ni4icant5 di44eent 4o" those o4 taded options, and

#ecause chan6es in su#Gecti+e input assu"ptions can "ateia5 a44ect the

4ai +aue esti"ates, in "ana6e"ent9s opinion, the existin6 "odes do not

necessai5 po+ide a eia#e sin6e "easue o4 the 4ai +aue o4 6ants

unde the Co"pan59s e"po5ee stoc#ased co"pensation pans?

NOTE &

EPLOEE BENEIT PLANS

The Co"pan5 has a +ounta5 de4eed co"pensation pan unde Section 10%(! o4 the Intena 8e+enue Code (the 10%(! Pan! 4o a e"po5ees =ho

satis45 the a6e and se+ice e*uie"ents unde the 10%(! Pan? Each

paticipant "a5 eect to conti#ute up to %0 o4 annua co"pensation, up to

the "axi"u" pe"itted unde 4edea a=, and the Co"pan5 is o#i6ated to

conti#ute annua5 an a"ount e*ua to %00 o4 the paticipant9s conti#ution

up to / o4 that paticipant9s annua co"pensation? E"po5ees conti#uted to

the 10%(! Pan -2,1'/,000, -2,/0%,000 and -2,$'1,000 in %&&&, %&&' and %&&3,

especti+e5? In accodance =ith the po+isions o4 the 10%(! Pan, the


29/46

Co"pan5 "atched e"po5ee conti#utions in the a"ount o4 -1,2%0,000,

-1,/3$,000 and -1,1&2,000 duin6 %&&&, %&&' and %&&3, especti+e5?

Additiona5, the Co"pan5 can "ae discetiona5 conti#utions #ased on the

po4ita#iit5 o4 the Co"pan5? o the 5ea ended Dece"#e $%, %&&&, the

Co"pan5 ecoded co"pensation expense 4o discetiona5 conti#utions o4

-$,/02,000? No discetiona5 conti#utions =ee "ade 4o the 5eas ended

Dece"#e $%, %&&' and %&&3?

The Co"pan5 aso has an un4unded, non*uai4ied de4eed co"pensation pan?

The pan ao=s o44ices, cetain othe e"po5ees and diectos o4 the

Co"pan5 to de4e a o pat o4 thei co"pensation, to #e paid to the

paticipants o thei desi6nated #ene4iciaies upon etie"ent, death o

sepaation 4o" the Co"pan5? o the 5eas ended Dece"#e $%, %&&&, %&&' and

%&&3, the tota paticipant de4eas, =hich ae e4ected in on6te"

ia#iities, =ee -&&3,000, -&0',000 and -%,%//,000, especti+e5? Incuded

in othe inco"e duin6 %&&& =ee net poceeds 4o" an insuance poic5

eated to the de4eed co"pensation pan o4 -$,/..,000?

NOTE %0

INCOE TAES

The Co"pan59s inco"e (oss! #e4oe inco"e tax po+ision (#ene4it! =as su#Gect

to taxes in the 4oo=in6 Guisdictions 4o the 4oo=in6 peiods)


%&&& %&&' %&&3

Do"estic - 32,3&& (- $1,222! - .%.,12$

oei6n &,/&' (1,$11! %,$%.

- '2,1&3 (- $','&&! - .%$,3/2

777777777777777777777777777777777777777777777777777777777777777777777777777777

The po+ision (#ene4it! 4o inco"e taxes is as 4oo=s)


30/46


%&&& %&&' %&&3

Cuent tax po+ision (#ene4it!)

;nited States - %1,33& - .%,$12 - //,1/.

State .,331 .,.&/ %.,1%&

oei6n $,011 .20 %,%20

De4eed tax expense (#ene4it!)

;nited States ',&2/ ($%,%3$! %,01.

State %,%/. (1,'13! 20

oei6n (210! (.0/! (/.!

Inco"e tax po+ision (#ene4it! - $0,%32 (-%.,$$2! - '%,0/%

77777777777777777777777777777777777777777777777777777777777777777777777777777777

Duin6 %&&&, %&&' and %&&3, the Co"pan5 eco6ni@ed cetain tax #ene4its eated to stoc option pans in the a"ount o4 -.,$33,000, -$,0/',000 and

-.&,3'/,000 especti+e5? Such #ene4its =ee ecoded as a eduction o4

inco"e taxes pa5a#e and an incease in additiona paidin capita?

Si6ni4icant co"ponents o4 the Co"pan59s de4eed tax assets and

ia#iities as o4 Dece"#e $%, %&&& and %&&' ae as 4oo=s)

(in thousands! Dece"#e $%,

%&&& %&&'

De4eed tax assets)8ese+es and ao=ances - .',02. - $/,..&

Depeciation and a"oti@ation %/,/0% 3,&/$

De4eed co"pensation 1,/3' $,%00

E44ect o4 in+ento5 o+ehead adGust"ent %,&33 1,0/.

Co"pensato5 stoc options and i6hts .,23$ .,$.3

oei6n net opeatin6 oss ca54o=ads 3&' %,031

Othe .,33$ $,&3&

8estuctuin6 cha6es


31/46

Lon6i+ed asset i"pai"ent %,310 %,322

8entaease aan6e"ents 223 2,13.

Esti"ated osses on assets hed

4o disposa 1,$$2

Capita oss ca54o=ad '.& /'2

Othe 2.Tax cedit ca54o=ads .,'.3

Tota de4eed tax assets /$,102 3%,0$$

Jauation ao=ance 4o de4eed

tax assets (1,%&0! (%,32&!

De4eed tax assets, net o4 +auation

ao=ance 2&,.%2 /&,.31

De4eed tax ia#iities)

State taxes, net o4 4edea inco"e

tax #ene4it (.,%.'! (.,/0'!

Net de4eed tax assets - 23,0'3 - //,///

7777777777777777777777777777777777777777777777777777777777777777777777777777777

At Dece"#e $%, %&&&, the Co"pan5 had tax cedit ca54o=ads pi"ai5

eatin6 to state in+est"ent tax cedits =hich ha+e expiation dates

#e6innin6 =ith Dece"#e $%, .00/?

A +auation ao=ance has #een esta#ished due to the uncetaint5 o4

eai@in6 cetain tax cedits, ca54o=ads, and a potion o4 othe de4eed

tax assets? The +auation ao=ance =as inceased #5 -.,1$%,000 duin6 %&&&,

o4 =hich -.,03$,000 =as atti#uta#e to state eseach and in+est"ent tax

cedits? Based on "ana6e"ent9s assess"ent, it is "oe ie5 than not that a the net de4eed tax assets =i #e eai@ed thou6h 4utue eanin6s o

i"pe"entation o4 tax pannin6 state6ies?

A econciiation o4 inco"e taxes co"puted #5 app5in6 the statuto5 ;?S?

inco"e tax ate to the Co"pan59s inco"e (oss! #e4oe inco"e taxes to the

inco"e tax po+ision (#ene4it! is as 4oo=s)



32/46

%&&& %&&' %&&3

A"ounts co"puted at

statuto5 ;?S? tax ate - .&,&.1 (-%$,/%2! - 31,'%/

State inco"e taxes, net

;?S? tax #ene4it $,01/ (%,20%! ',%02 State tax cedits, net o4

;?S? tax #ene4it (.,032!

Nondeducti#e 4oei6n osses (13/! %,../

Expenses =ith no tax #ene4it '%1 %,0/1

Nondeducti#e capita osses %$0 2''

oei6n saes copoation

tax #ene4its (%,13%! (.$/! (.,2%&!

Nontaxa#e insuance poceeds (%,10'!

Chan6e in tax +auation ao=ance .,1$%

Othe (310! %$& /2&

Inco"e tax po+ision (#ene4it! - $0,%32 (-%.,$$2! - '%,0/% 777777777777777777777777777777777777777777777777777777777777777777777777777777

;?S? tax etun exa"inations ha+e #een co"peted 4o the 5eas thou6h

%&&1? ana6e"ent #eie+es ade*uate po+isions 4o inco"e tax ha+e #een

ecoded 4o a 5eas?

NOTE %%

COITENTS AND CONTINENCIES

The Co"pan5 and its su#sidiaies, incident to thei #usiness acti+ities, ae

paties to a nu"#e o4 e6a poceedin6s, a=suits and othe cai"s? Such "attes ae su#Gect to "an5 uncetainties and outco"es ae not pedicta#e

=ith assuance? Conse*uent5, "ana6e"ent is una#e to ascetain the uti"ate

a66e6ate a"ount o4 "oneta5 ia#iit5, a"ounts =hich "a5 #e co+eed #5

insuance, o the 4inancia i"pact =ith espect to these "attes as o4

Dece"#e $%, %&&&? Ho=e+e, "ana6e"ent #eie+es that the 4ina esoution o4

these "attes, indi+idua5 and in the a66e6ate, =i not ha+e


33/46

a "ateia ad+ese e44ect upon the Co"pan59s annua consoidated 4inancia

position, esuts o4 opeations o cash 4o=s?

The Co"pan5 eases cetain =aehouse, disti#ution and o44ice 4aciities,

as =e as o44ice and "anu4actuin6 e*uip"ent unde opeatin6 eases? Lease

te"s an6e 4o" one to %0 5eas =ith options to ene= at +a5in6 te"s? Caa=a5 o4 Ba Co"pan5 has 6uaanteed the esidua +aue o4 e*uip"ent

eased pusuant to an opeatin6 ease =hich is su#Gect to ene=a? The

esidua +aue 6uaantee, =hich appoxi"ates esti"ated 4ai "aet +aue o4

the e*uip"ent at each option peiod, is educed o+e ti"e? Co""it"ents 4o

"ini"u" ease pa5"ents unde non cancea#e opeatin6 eases ha+in6 initia

o e"ainin6 noncancea#e te"s in excess o4 one 5ea as o4 Dece"#e $%,

%&&& ae as 4oo=s)

(in thousands!

.000 -%%,%.'

.00% &,322 .00. /,/%.

.00$ %,&3.

.001 %,&01

Theea4te 3,&./

-$&,.&3

777777777777777777777777777777777777777777777777777777777777777777777777777777

utue "ini"u" ease pa5"ents ha+e not #een educed #5 4utue "ini"u"

su#ease entas o4 -.,.03,000 unde an opeatin6 ease? At Dece"#e $%,

%&&&, the Co"pan5 is contin6ent5 ia#e 4o -/,2/$,000 thou6h e#ua5 .00$

unde an opeatin6 ease that =as assi6ned to a thid pat5 (Note %. !? 8ent expense 4o the 5eas ended Dece"#e $%, %&&&, %&&' and %&&3 =as -.,$%2,000,

-%3,/21,000 and -%,3/0,000, especti+e5? 8ent expense 4o %&&& does not

incude a cedit o4 -/,03/,000 eated to the e+esa o4 a estuctuin6

ese+e 4o excess ease costs (Note %.!? 8ent expense 4o %&&' incudes

-%$,1//,000 in excess ease costs eated to the Co"pan59s estuctuin6

acti+ities (Note %.!? The Co"pan5 had no capita eases at Dece"#e $%, %&&&?

NOTE %.


34/46

8EST8;CT;8IN

Duin6 the 4outh *uate o4 %&&', the Co"pan5 ecoded a estuctuin6

cha6e o4 -21,.$2,000 esutin6 4o" a nu"#e o4 cost eduction actions and

opeationa i"po+e"ents? These actions incuded) the consoidation o4 the opeations o4 the Co"pan59s =ho5o=ned su#sidia5, Od5sse5, into the

opeations o4 the Co"pan5 =hie "aintainin6 the distinct and sepaate

Od5sse5(8! #andM the discontinuation, tans4e o suspension o4 cetain

initiati+es not diect5 associated =ith the Co"pan59s coe #usiness, such as

the Co"pan59s in+o+e"ent =ith inteacti+e 6o4 sites, 6o4 #oo pu#ishin6,

ne= pa5e de+eop"ent and a 6o4 +enue in Las Je6asM and the esi@in6 o4

the Co"pan59s coe #usiness to e4ect cuent and expected #usiness

conditions? These initiati+es =ee co"peted duin6 %&&&, =ith the exception

o4 cash outa5s eated to the assi6n"ent o4 a ease o#i6ation 4o a

4aciit5 in Ne= o Cit5 that =i continue thou6h u5 .000? The

estuctuin6 cha6es (sho=n #eo= in ta#ua 4o"at! pi"ai5 eated to)

%! the ei"ination o4 Go# esponsi#iities, esutin6 in costs incued 4o e"po5ee se+eanceM .! the decision to exit cetain noncoe #usiness

acti+ities, esutin6 in osses on disposition o4 the Co"pan59s '0 inteest

in CJ (Note %1!, a oss on the sae o4 the #usiness o4 AA"eican (Note

%1!, as =e as excess ease costsM and $! consoidation o4 the Co"pan59s

continuin6 opeations esutin6 in i"pai"ent o4 assets, osses on

disposition o4 assets and excess ease costs?

E"po5ee eductions occued in a"ost a aeas o4 the Co"pan5, incudin6

"anu4actuin6, "aetin6, saes, and ad"inistati+e aeas? At Dece"#e $%,

%&&', the Co"pan5 had educed its nonte"poa5 =o 4oce #5 appoxi"ate5

320 positions? Athou6h su#stantia5 a eductions occued pio to

Dece"#e $%, %&&', a s"a nu"#e o4 eductions occued in the 4ist *uate o4 %&&&?

Duin6 the estuctuin6, the Co"pan5 consoidated its opeations and sod

cetain o4 its #uidin6s, =hich housed a potion o4 its "anu4actuin6 and

eseach and de+eop"ent acti+ities? Othe =itedo=ns =ee ecoded duin6

%&&' 4o ide assets, assets =hose "anne o4 use had chan6ed si6ni4icant5

and e*uip"ent epaced as a esut o4 capita i"po+e"ents? The i"paied

assets incuded #uidin6s, #uidin6 i"po+e"ents, and "achine5 and e*uip"ent


35/46

used in cetain o4 the Co"pan59s "anu4actuin6 and eseach and de+eop"ent

acti+ities?

The poGected 4utue cash 4o=s 4o" these assets =ee ess than the

ca5in6 +aues o4 the assets? The ca5in6 +aues o4 the assets hed 4o

sae and the assets to #e hed and used =ee educed to thei esti"ated 4ai +aues #ased on independent appaisas o4 sein6 +aues and +aues o4

si"ia assets sod, ess costs to se? In %&&', the Co"pan5 ecoded osses

4o" i"pai"ent o4 assets o4 -%.,/$1,000, =hich =ee ecoded as

estuctuin6 costs? The Co"pan5 co"peted the dispositions in %&&&? At

Dece"#e $%, %&&', su#se*uent to the =itedo=n 4o i"pai"ents, the ca5in6

a"ount o4 the assets hed 4o disposa and assets to #e hed and used =as

-%$,/3',000 and -1,2'.,000, especti+e5? The Co"pan5 continued to depeciate

the assets that =ee hed and used #ut did not 4uthe depeciate the assets

hed 4o disposition? The e44ect on depeciation 4o the 5ea ended Dece"#e

$%, %&&& did not "ateia5 i"pact the Co"pan59s esuts o4 opeations and

"ana6e"ent does not expect this e44ect to "ateia5 i"pact 4utue esuts o4

opeations?

Detais o4 the oneti"e cha6e ae as 4oo=s (in thousands!)

8ese+e

8ese+e

Cash OneTi"e Baance

Baance

NonCash Cha6e Acti+it5 at %.$%&'

Acti+it5(%! at %.$%&&

ELIINATION O OB 8ESPONSIBILITIES -%%,//1 - ',13$ - $,%&%

- $,%&%

Se+eance paca6es Cash %%,/0$ ',1%. $,%&%

$,%&%


36/46

Othe Noncash /% /%

EITIN CE8TAIN NONCO8E B;SINESS ACTIJITIES -.',3'' -%.,0%2 -%/,33$

-%2,$&1 - %,$3&

Loss on disposition o4 su#sidiaies Noncash %$,03. %0,$1% .,3$%

.,3$%(.! Excess ease costs Cash %.,//0 %1/ %.,2%1

%%,%$2 %,$3&

Contact canceation 4ees Cash .,300 %,201 %,%&/

%,%&/

Othe Cash $2/ .1 $$.

$$.

CONSOLIDATION O OPE8ATIONS -%$,3'$ - .,'1/ -%0,&$3

-%0,&$3

Loss on i"pai"entdisposition o4 assets Noncash %.,$/1 .,3$0 &,/$1

&,/$1($!

Excess ease costs Cash '0/ 1 '0.'0.(1!

Othe Cash /%$ %%. 20%

20%

777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

7777777777777777777777

(%! Incudes e+esa o4 ese+e totain6 -',/0&,000, as actua a"ounts

di44eed 4o" esti"ates? Si6ni4icant e+esas ae noted #eo= in (.!

thou6h(1!

(.! Incudes e+esa o4 -/,03/,000 o4 ese+e due to the assi6n"ent o4 ease o#i6ation at te"s si6ni4icant5 "oe 4a+oa#e than esti"ated at the

esta#ish"ent o4 the ese+e?

($! Incudes e+esa o4 -%,130,000 o4 ese+e eated to disposition o4 t=o

#uidin6s at hi6he saes pices than esti"ated? (1! Incudes e+esa o4

-1&%,000 o4 ese+e due to the su#ease o4 a 4aciit5 at te"s "oe

4a+oa#e than esti"ated at the esta#ish"ent o4 the ese+e?


37/46

Duin6 %&&&, the Co"pan5 incued cha6es o4 -%,.&2,000 on the disposition

o4 #uidin6 i"po+e"ents ei"inated duin6 the consoidation o4 "anu4actuin6

opeations, as =e as othe cha6es o4 -/3%,000? These cha6es did not "eet

the citeia 4o accua in %&&'? Additiona5, the Co"pan5 incued cha6es

o4 -31&,000 eated to asset dispositions and othe estuctuin6 acti+ities

4o =hich ese+es =ee not esta#ished in %&&'? utue cash outa5s ae anticipated to #e co"peted #5 u5 .000?

NOTE %$

LITIATION SETTLEENT

In %&&3, the Co"pan5 setted a a=suit #ou6ht a6ainst it and cetain

o44ices o4 the Co"pan5 #5 a 4o"e o44ice o4 the Co"pan5 =ith the pa5"ent

o4 -%.,000,000?

The Co"pan5 4ied suit a6ainst cetain o4 its insues and an insuance

a6ent seein6 co+ea6e 4o the costs o4 de4endin6 and settin6 the a#o+e a=suit (the co+ea6e iti6ation!? The insues and the insuance a6ent

setted =ith the Co"pan5 in %&&' 4o an a"ount that =as not "ateia? This

sette"ent =as ecoded in 6enea and ad"inistati+e expenses as a eduction

o4 e6a 4ees?

NOTE %1

A:;ISITIONS AND 8EO8ANIATIONS

Duin6 %&&&, the Co"pan5 ac*uied disti#ution i6hts and su#stantia5 a

o4 the assets 4o" its disti#uto in Ieand 4o -'%0,000? Aso in %&&&, the

Co"pan5 "e6ed its su#sidia5, Caa=a5 o4 Euope, S?A?, =ith anothe o4 its su#sidiaies, Caa=a5 o4 Euope, Ltd? and no= opeates in ance

thou6h a sateite o44ice? Duin6 %&&', the Co"pan5 ac*uied disti#ution

i6hts and su#stantia5 a o4 the assets 4o" its disti#utos in Koea,

Canada, ance, Be6iu", No=a5 and Den"a, as =e as the e"ainin6 .0

inteest in Caa=a5 o4 Tadin6 "#H (Note %/!, the esuts o4 =hich ae

consoidated in the esuts o4 Caa=a5 o4 (e"an5! "#H? The a66e6ate

puchase pice 4o these tansactions =as -.3,..&,000, excudin6 the

assu"ption and su#se*uent etie"ent o4 shotte" de#t


38/46

o#i6ations o4 -%0,$3$,000? The excess o4 the puchase pice o+e net assets

ac*uied o4 -.0,&$2,000 =as aocated to 6ood=i and is #ein6 a"oti@ed o+e

esti"ated use4u i+es o4 thee to %0 5eas? These ac*uisitions, aon6 =ith

the ac*uisition o4 the e"ainin6 '0 inteest in AA"eican (discussed #eo=! ae not consideed si6ni4icant #usiness co"#inations? Accodin65, po

4o"a 4inancia in4o"ation is not pesented?

In a5 %&&', the Co"pan5 ac*uied 4o -1,2./,000 the e"ainin6 '0

inteest in AA"eican, =hich opeates a ninehoe 6o4 couse, pe4o"ance

cente, tainin6 4aciit5 and di+in6 an6e ocated in Las Je6as, Ne+ada? On

Dece"#e $0, %&&', as pat o4 its #usiness pan to discontinue cetain

noncoe #usiness acti+ities, the Co"pan5 sod the #usiness o4 AA"eican

in exchan6e 4o #ate tade cedits, =hich =ee ecoded at the 4ai "aet

+aue o4 the asset exchan6ed? The Co"pan5 ecoded a oss on the disposition

o4 this #usiness o4 -%0,$1%,000 in Dece"#e %&&' (Note %.!?

On Au6ust ', %&&3, the Co"pan5 consu""ated its ac*uisition o4

su#stantia5 a o4 the assets and cetain ia#iities o4 Od5sse5 Spots,

Inc?, #5 its =ho5o=ned su#sidia5, Od5sse5, su#Gect to cetain adGust"ents

as o4 the ti"e o4 cosin6? Od5sse59s esuts o4 opeations ha+e #een incuded

in the Co"pan59s consoidated esuts o4 opeations since Au6ust ', %&&3?

Od5sse5 "anu4actued and "aeted the Od5sse5(8! ine o4 puttes and =ed6es

=ith Stono"ic(8! and L5conite(8! 4ace insets? Duin6 %&&', as pat o4 its

estuctuin6 pan, the opeations o4 Od5sse5 =ee consoidated into that o4

the Co"pan5, =hie "aintainin6 the distinct and sepaate Od5sse5(8! #and? In

%&&&, Od5sse5 =as disso+ed as a copoate entit5 and as a su#sidia5?

The cost to ac*uie su#stantia5 a o4 the assets and cetain ia#iities o4 Od5sse5 Spots, Inc?, incudin6 po4essiona 4ees diect5

eated to the ac*uisition, =as appoxi"ate5 -%.&,.2/,000 and has #een

accounted 4o usin6 the puchase "ethod o4 accountin6? A"ounts aocated to

tade na"e, tade"a, tade dess and 6ood=i ae #ein6 a"oti@ed on the

stai6htine #asis o+e 10 5eas? The a"ounts aocated to the pocess

patent and co+enant not to co"pete ae #ein6 a"oti@ed on the stai6ht ine

#asis o+e %/ and thee 5eas, especti+e5?


39/46

The 4oo=in6 unaudited po 4o"a net saes, net inco"e and eanin6s pe

shae data 4o the 5ea ended Dece"#e $%, %&&3 ae #ased on the especti+e

histoica 4inancia state"ents o4 the Co"pan5 and Od5sse5 Spots, Inc? The

po 4o"a data pesented 4o the 5ea ended Dece"#e $%, %&&3 co"#ines the

esuts o4 opeations o4 the Co"pan5 4o the 5ea ended Dece"#e $%, %&&3

=ith the esuts o4 opeations o4 Od5sse5 Spots, Inc? 4o the ten "onths ended Au6ust 3, %&&3 and the esuts o4 Od5sse5 4o the t=o "onths ended

Septe"#e $0, %&&3 and assu"es that the ac*uisition o4 su#stantia5 a o4

the assets and cetain ia#iities o4 Od5sse5 Spots, Inc? occued on

anua5 %, %&&3?

The po 4o"a 4inancia data pesented ae not necessai5 indicati+e o4

the Co"pan59s esuts o4 opeations that "i6ht ha+e occued had the

tansaction #een co"peted at the #e6innin6 o4 the peiod speci4ied, and do

not pupot to epesent =hat the Co"pan59s consoidated esuts o4

opeations "i6ht #e 4o an5 4utue peiod?

(in thousands, except pe shae data! ea Ended Dece"#e $%,

%&&3

(unaudited!

Net saes -''1,'10

Net inco"e -%$1,2%.

Eanin6s pe co""on shae)

Basic - %?&3

Diuted - %?''

7777777777777777777777777777777777777777777777777777777777777777777777

NOTE %2

SEENT INO8ATION

The Co"pan59s opeatin6 se6"ents ae o6ani@ed on the #asis o4 poducts and

incude 6o4 cu#s and 6o4 #as? The o4 Cu#s se6"ent consists o4


40/46

Caa=a5 o4(8! titaniu" and stainess stee "eta =oods and ions, Caa=a5

o4(8! and Od5sse5(8! puttes and =ed6es, and saes o4 eated accessoies?

The o4 Bas se6"ent consists o4 6o4 #as that ae desi6ned and

"anu4actued, and =i #e "aeted and disti#uted #5 the Co"pan59s

=ho5o=ned su#sidia5, Caa=a5 o4 Ba Co"pan5? A Othe se6"ents,

incudin6 inteacti+e 6o4 sites, 6o4 #oo pu#ishin6, ne= pa5e de+eop"ent and a di+in6 an6e +entue, ae a66e6ated as the5 do not "eet

e*uie"ents 4o sepaate discosue set 4oth in SAS No? %$%? In accodance

=ith its estuctuin6 pan, the Co"pan5 is no on6e pusuin6 these

initiati+es (Note %.!? Thee ae no si6ni4icant intese6"ent tansactions?

The ta#e #eo= contains in4o"ation utii@ed #5 "ana6e"ent to e+auate its

opeatin6 se6"ents?

(in thousands!

%&&& o4 Cu#s o4 Bas A Othe

Consoidated

Net saes - 3%1,13% -

3%1,13%

Inco"e (oss! #e4oe tax %.$,&.. (- $',1.2!

'2,1&3

Inteest inco"e 2,1/$

2,1/$

Inteest expense (.,...! (%,$3.!

($,2&1! Depeciation and a"oti@ation $/,%2% $,3./

$&,'33

Additions to on6i+ed assets %0,.%0 1/,&%.(%!

23,%..

777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

77777


41/46

%&&' o4 Cu#s o4 Bas A Othe

Consoidated

Net saes - /&3,/.% -/&3,/.%

Inco"e (oss! #e4oe tax &,%'. (- ..,1./! (- .2,/22!

($','&&!

Inteest inco"e %,2/1 3

%,23%

Inteest expense (.,.2.! (1%&!

(.,/3%!

Depeciation and a"oti@ation $1,%.% %,03. /&.

$2,''2

Additions to on6i+ed assets $&,'21 13,3.%(%! %,10'

'',&'$

777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

77777

%&&3 o4 Cu#s o4 Bas A Othe

Consoidated

Net saes - '1.,&.3 -

'1.,&.3

Inco"e (oss! #e4oe tax ...,33% (- &,0%$! - 3

.%$,3/2

Inteest inco"e 1,30$1,30$

Inteest expense (%0!

(%0!

Depeciation and a"oti@ation %&,.%& '1 %02

%&,10'

Additions to on6i+ed assets %//,1/% %0,./$ '.$

%33,213


42/46

777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

77777

(%! Incudes an a66e6ate o4 -20,000,000 con+eted to an opeatin6 ease in

%&&& (Note 1!?

The Co"pan5 "aets its poducts do"estica5 and intenationa5, =ith

its pincipa intenationa "aets #ein6 Asia and Euope? The ta#e #eo=

contains in4o"ation a#out the 6eo6aphica aeas in =hich the Co"pan5

opeates? 8e+enues ae atti#uted to the ocation to =hich the poduct =as

shipped? Lon6i+ed assets ae #ased on ocation o4 do"icie?

The Co"pan5, thou6h a disti#ution a6ee"ent, had appointed Su"ito"o as

the soe disti#uto o4 Caa=a5 o4(8! cu#s in apan? The disti#ution

a6ee"ent, =hich #e6an in e#ua5 %&&$ and ended on Dece"#e $%, %&&&,

e*uied Su"ito"o to puchase speci4ied "ini"u" *uantities? In %&&&, %&&',

and %&&3, saes to Su"ito"o accounted 4o 3, ' and %0, especti+e5, o4 the Co"pan59s net saes? In the 4outh *uate o4 %&&&, the Co"pan5

success4u5 co"peted ne6otiations =ith Su"ito"o to po+ide a s"ooth

tansition o4 its #usiness? As a esut o4 this tansition a6ee"ent, the

Co"pan5 ecoded a net cha6e o4 -'?/ "iion in the 4outh *uate o4 %&&&

4o #u5in6 cetain cuent in+ento5, pa5"ents 4o noncuent in+ento5 and

othe tansition expenses, incudin6 4oei6n cuenc5 tansaction osses?

Od5sse5(8! #and poducts ae sod thou6h the Co"pan59s =ho5o=ned

apanese su#sidia5, Caa=a5 o4 K?K?, and #e6innin6 anua5 %, .000,

Caa=a5 o4(8! #and poducts aso =i #e sod thou6h this su#sidia5?

(In thousands! %&&& Saes Lon6Li+ed Assets

;nited States -1%1,%$/ -.1%,.1%

Euope %%2,/3$ %1,0.3

apan 22,&.' .,/$1

8est o4 Asia 3$,%.% &31

Othe 4oei6n counties 22,/%$ $,1'%


43/46

Tota -3%1,13% -./.,$23

777777777777777777777777777777777777777777777777777777777777777777777777777777

%&&' Saes Lon6Li+ed Assets

;nited States -1$3,/.3 -.33,/%%

Euope %%/,$21 %3,3'& apan /%,1/0 '23

8est o4 Asia $1,%'& %,%&1

Othe 4oei6n counties 13,&&% $,%..

Tota -/&3,/.% -$00,23$

777777777777777777777777777777777777777777777777777777777777777777777777777777

%&&3 Saes Lon6Li+ed Assets

;nited States -213,.2/ -.20,21'

Euope %0',/2& 1,0$2

apan '1,/$1 /%

8est o4 Asia 21,0.& Othe 4oei6n counties 1',$1&

Tota -'1.,&.3 -.21,/11

777777777777777777777777777777777777777777777777777777777777777777777777777777

NOTE %/

T8ANSACTIONS FITH 8ELATED PA8TIES

Duin6 %&&', the Co"pan5 enteed into an a6ee"ent =ith Caa=a5 Editions,

Inc? to 4o" CJ, a i"ited ia#iit5 co"pan5 that =as o=ned '0 #5 the

Co"pan5 and .0 #5 Caa=a5 Editions, Inc? (Caa=a5 Editions!? Caa=a5 Editions is a pu#ishin6 and "edia co"pan5 =hich is o=ned & #5 E5 Caa=a5,

Chai"an and Chie4 Executi+e O44ice o4 the Co"pan5, and '% #5 his son,

Nichoas Caa=a5? CJ =as 4o"ed to poduce pint and othe "edia poducts

that eate to the 6a"e o4 6o4? Pusuant to the a6ee"ent, the Co"pan5

a6eed to oan CJ up to -.0,000,000 4o =oin6 capita, su#Gect to CJ9s

achie+e"ent o4 cetain "iestones to the satis4action o4 the Co"pan5 in its

soe discetion? Aso pusuant to the a6ee"ent, CJ =as o#i6ated to pa5 an

annua "ana6e"ent 4ee o4 -120,000 to Caa=a5 Editions? In conGunction =ith


44/46

the Co"pan59s estuctuin6 pan, the Co"pan5 co""itted to se o assi6n its

inteest in CJ to Caa=a5 Editions? Accodin65, the Co"pan5 ecoded a

cha6e in opeations to Dece"#e %&&' #ased on the Dece"#e $%, %&&' #oo

+aue o4 CJ (Note %.!?

Duin6 %&&&, the Co"pan5 4o6a+e the existin6 oan #aance 4o" CJ o4 appoxi"ate5 -.,%1.,000, sod its inteest to Caa=a5 Editions 4o a

no"ina a"ount and paid -%,000,000 as consideation 4o eease 4o" its

o#i6ation to oan CJ up to -.0,000,000? These tansactions did not esut

in a cha6e in %&&&, as the5 =ee ade*uate5 accued in the %&&'

estuctuin6 ese+e (Note %.!?

In Dece"#e %&&', the Co"pan5 puchased the e"ainin6 .0 inteest in

Caa=a5 o4 Tadin6 "#H, the Co"pan59s 4o"e e"an disti#uto, 4o

-/,3//,000? The puchase pice =as in the 4o" o4 a note pa5a#e #eain6

inteest at 3, due in une %&&& to the see, =ho is an o44ice o4 a

=ho5o=ned su#sidia5 o4 Co"pan5? The note pa5a#e =as incuded in accounts

pa5a#e and accued expenses at Dece"#e $%, %&&' and =as paid in e#ua5 %&&&?

8EPO8T O INDEPENDENT ACCO;NTANTS

LOO APPEA8S HE8E

To the Boad o4 Diectos and Shaehodes o4 Caa=a5 o4 Co"pan5)

In ou opinion, the acco"pan5in6 consoidated #aance sheet and the eated

consoidated state"ents o4 opeations, o4 cash 4o=s and o4 shaehodes9e*uit5

pesent 4ai5, in a "ateia espects, the 4inancia position o4 Caa=a5

o4 Co"pan5 and its su#sidiaies at Dece"#e $%, %&&& and %&&', and the esuts

o4 thei opeations and thei cash 4o=s 4o each o4 the thee 5eas in the

peiod ended Dece"#e $%, %&&& in con4o"it5 =ith accountin6 pincipes

6enea5 accepted in the ;nited States? These 4inancia state"ents ae the

esponsi#iit5 o4 the Co"pan59s "ana6e"entM ou esponsi#iit5 is to expess an

opinion on these 4inancia state"ents #ased on ou audits? Fe conducted ou

audits o4 these state"ents in accodance =ith auditin6 standads 6enea5

accepted in the ;nited States, =hich e*uie that =e pan and pe4o" the audit


45/46

to o#tain easona#e assuance a#out =hethe the 4inancia state"ents ae 4ee

o4 "ateia "isstate"ent? An audit incudes exa"inin6, on a test #asis, e+idence

suppotin6 the a"ounts and discosues in the 4inancia state"ents, assessin6

the accountin6 pincipes used and si6ni4icant esti"ates "ade #5 "ana6e"ent, and

e+auatin6 the o+ea 4inancia state"ent pesentation? Fe #eie+e that ou

audits po+ide a easona#e #asis 4o the opinion expessed a#o+e?

s P8ICEFATE8HO;SECOOPE8S LLP

San Die6o, Cai4onia

anua5 ./, .000

S;A8IED :;A8TE8L INANCIAL DATA (;NA;DITED!

(in thousands, except pe shae data! isca ea %&&& :uates

%st .nd $d 1th Tota

Net saes -%'2,311 -..&,30' -%'$,$$2 -%%2,/'1 -3%1,13%

oss po4it - '$,2.0 -%0',//1 - '&,'&/ - 22,&'/ -$$',0//

Net inco"e - %.,'.$ - .1,33% - %3,23. - %2/ - 22,$..

Eanin6s pe co""on shaeQ

Basic - 0?%' - 0?$2 - 0?.2 - 0?00 - 0?3&

Diuted - 0?%' - 0?$2 - 0?.2 - 0?00 - 0?3'

7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

isca ea %&&' :uates

%st .nd $d 1th Tota

Net saes - %3/,&0' - .$$,.2% - %3.,&11 - %%1,2%' - /&3,/.%

oss po4it - '$,302 - %0',3&0 - '$,0'2 - .0,1$1 - .&/,0%1

Net inco"e(oss! - %%,%/0 - .%,%$3 - 2,'$/ (- /1,/&3! (- ./,2/1!


46/46

Eanin6s(oss! pe co""on shaeQ

Basic - 0?%/ - 0?$0 - 0?0' (- 0?&$! (- 0?$'!

Diuted - 0?%/ - 0?$0 - 0?0' (- 0?&$! (- 0?$'!

7777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777

Q Eanin6s pe shae is co"puted indi+idua5 4o each o4 the *uates

pesentedM thee4oe, the su" o4 the *uate5 eanin6s pe shae "a5 not

necessai5 e*ua the tota 4o the 5ea?

A8KET O8 COON SHA8ES AND 8ELATED SHA8EHOLDE8 ATTE8S

The Co"pan59s Co""on Shaes ae taded on the Ne= o Stoc Exchan6e (NSE!?

The Co"pan59s s5"#o 4o its Co""on Shaes is EL?

As o4 ach /, .000, the appoxi"ate nu"#e o4 hodes o4 ecod o4 the

Co"pan59s Co""on Stoc =as &,1%2?

STOCK P8ICE INO8ATION

ea ended Dece"#e $%,

%&&& %&&'

Peiod) Hi6h Lo= Di+idend Hi6h Lo= Di+idend

ist :uate -%%?11 -%0?00 -0?03 -$$?.2 -./?20 -0?03

Second :uate -%/?/& -%.?%& -0?03 -.&?11 -%3?&1 -0?03

Thid :uate -%1?/$ - &?$% -0?03 -.0?20 - &?2/ -0?03

outh :uate -%'?00 -%%?/& -0?03 -%$?2/ - &?'% -0?03

777777777777777777777777777777777777777777777777777777777777777777777777777777

Documents

Callaway Golf Company 1998-1999