Global Edition

Callaway to beat Wall Street projections

10.00am 17th December 2002 - Corporate

Callaway Golf Company (NYSE:ELY) has announced that it expects net sales and earnings for the year ending 31st December 2002 to be higher than current Wall Street projections. Positive early results from the launch of the new Great Big Bertha II premium titanium line of drivers, continued strong demand for the Odyssey White Hot 2-Ball Putter, and higher sales in core products are driving the higher net sales.

The Company currently expects net sales for the full year to be approximately $790 million, and earnings for the full year to be between $0.96 and $1.00, including about $0.16 per share as the result of a reduction in warranty reserve reflected in the third quarter. Excluding the $17.0 million non-cash reduction of warranty reserve, full year diluted earnings per share is expected to be between $0.80 and $0.84.

The Company’s guidance for the full year 2002 includes a pre-tax charge of $2.25 million associated with a recent customs and duty assessment in Korea. Although this assessment occurred after the Company had reported earnings for the third quarter, accounting rules will require the Company to reflect the adjustment in its 10-Q for the third quarter when filed. The Company intends to appeal the assessment. However, accounting rules do not permit the Company to record any offsets for anticipated future recoveries at this time.

For the first quarter and full year 2003, respectively, the Company’s current guidance is that net sales are estimated to be approximately $270 million, a 5% increase compared to 2002, with annual net sales estimated to be flat year over year. Fully diluted earnings per share are estimated to be $0.54 for the quarter, and $0.88 for the full year, excluding the warranty adjustment from 2002 results. In providing this guidance, the Company is taking into account an expected improvement in product mix and some savings as a result of the cost reduction actions implemented in 2002. Some of this extra margin will be re-invested in carefully managed promotional spending and legal costs associated with protecting the Company’s intellectual property.

At this time the Company’s guidance for 2003 does not include any revenues or earnings associated with additional new club or ball product launches that may or may not occur later in 2003. The Company traditionally does not pre-announce product launches and, consistent with that practice, does not intend to provide early disclosure, one way or the other, regarding any currently unannounced product launches for 2003. As a result, the full year guidance does not include any boost to fourth quarter business similar to what occurred in the fourth quarter of 2002 with the limited launch of Great Big Bertha II Drivers.

“As previously stated, the Company is addressing all available actions to eliminate the losses in its golf ball business,” said Ron Drapeau, chairman, president and CEO. “In the short term we have been able to reduce some operating costs through our recent reduction in headcount, and we have planned for some savings in 2003 through the better management of advertising and selling expenses while maintaining our important position as the #2 ball on the professional tours. We are also in the process of evaluating a possible consolidation of club and ball manufacturing operations that could result in a reduction in overhead expenses.”

“Other options regarding our golf ball business are still under evaluation,” Mr. Drapeau continued. “I have read that some analysts have suggested we look at options ranging from expanding our ball manufacturing operations and making golf balls for others, to eliminating our ball manufacturing and sourcing all of our requirements from a third party. All I can say at this time is that these options, as well as others, are among those being reviewed by management and the board of directors as we target for ourselves the goal of achieving profitability by 2004.”

At the current time, the Company does not see significant improvement in many of the factors that have had a negative effect on sales and earnings in 2002. For example, the economies in the U.S. and Japan are not expected to improve significantly next year, and consumer spending in those countries remains at depressed levels.

There has yet to be any observable evidence that the number of rounds played is likely to increase or even stop declining in 2003. Moreover, the ruling bodies in golf continue to review matters such as a limitation on club head size and the overall performance of golf balls, and rulings rolling back either could confuse consumers and disrupt the market as happened this year with the aborted decision on driver COR. Such factors are beyond the Company’s control, and a change for the worse in any of these areas could limit the Company’s ability to achieve its targets for the year.

Also announced is the unanimous agreement of the Board of Directors and its Audit Committee to dismiss KPMG LLP as the Company’s outside independent auditors, and to engage Deloitte & Touche as auditors for 2002, pending the satisfactory completion of their customary client acceptance procedures, which the Company expects to be completed shortly.

At the time of the change in auditors, the final decision regarding the proper treatment of the reduction in warranty reserves of approximately $17 million had not yet been made, and the Company’s filing with the SEC of its Report on Form 10-Q had not been completed. The Audit Committee will ask Deloitte & Touche to make resolution of this matter a high priority/

KPMG had been appointed as the Company’s independent auditors with effect from 25th March 2002 and has never issued a report on the Company’s financial statements. The delayed filing of Form 10-Q for the third quarter was because the Company and KPMG were still in the process of reviewing the appropriate periods in which to record a $17 million reduction in the Company’s warranty reserve. While both management and KPMG agree with the magnitude of the adjustment, they have been unable to reach agreement as to the proper period or periods in which to reflect the non-cash increase in net income. Ultimately, the Audit Committee recommended that the Board seek new outside auditors.

“In making this change, we wish to point out that neither the Audit Committee nor the Board has made a final determination as to the proper treatment of the reduction in warranty reserves,” stated Ronald S. Beard, chair of the Audit Committee. “It is our plan to work with Deloitte & Touche to resolve this matter, one way or another, as quickly as possible and file our 10-Q.”

Brad Holiday, executive vice president and chief financial officer, stated, “While we regret our delay in resolving this accounting issue, we want to remind investors that this is strictly a non-cash accounting matter as to which periods to record an increase in earnings due to the reduction in the Company’s warranty reserve. In our reporting on this matter to date, we have made clear to our shareholders and to potential investors our financial results from operations both with and without the effect of this adjustment.”

Callaway Golf

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