Callaway 2003 Annual Report Download - page 17

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14 CALLAWAY GOLF COMPANY
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is
contained in Note 2 to the Consolidated Financial Statements
for the year ended December 31, 2003, which note is incorpo-
rated herein by this reference.
Top-Flite Acquisition
During the latter part of 2003, the Company completed the
acquisition through a court-approved sale of substantially all
of the golf-related assets of TFGC Estate Inc. (f/k/a The Top-
Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc.),
which included golf ball manufacturing facilities, the Top-
Flite, Strata and Ben Hogan brands, and all golf-related
patents and trademarks. The Company acquired the Top-Flite
assets because they provided a unique opportunity to increase
significantly the size and profitability of the Company’s golf
ball business and the Company was able to purchase the
acquired assets at less than their estimated fair value. The
Company intends to continue the U.S. and foreign operations
of the acquired golf assets, including the use of acquired assets
in the manufacture of golf balls and golf clubs and the
commercialization of existing Top-Flite, Strata and Ben Hogan
brands, patents and trademarks.
The acquisition was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards (“SFAS”)
No. 141, “Business Combinations.” Under SFAS No. 141, the
estimated aggregate cost of the acquired assets is $183.1 million,
which includes cash paid ($154.1 million), transaction costs
(approximately $6.2 million), and assumed liabilities (approx-
imately $22.8 million). The estimated fair value of the assets
exceeded the estimated aggregate acquisition costs. As a
result, the Company was required to reduce the carrying
value of the acquired long-term assets on a pro rata basis. In
accordance with applicable accounting rules, a final determi-
nation of the allocation of the aggregate acquisition costs will
be made upon a final assessment of the estimated fair value of
the acquired net assets. It is anticipated that the final assessment
will be completed during the second quarter of 2004 and that
the final allocation will not differ materially from the
pre
liminary allocation. The preliminary allocation is as follows
(in millions):
Assets Acquired:
Accounts receivable $ 44.0
Inventory 32.8
Other assets 1.1
Property and equipment 56.7
Intangible assets 48.5
Liabilities Assumed:
Current liabilities (18.0)
Long-term liabilities (4.8)
Total net assets acquired $ 160.3
During the fourth quarter of 2003, the Company began
consolidating the Callaway Golf and Top-Flite golf ball and golf
club manufacturing and research and development operations.
In connection with this consolidation, the Company disposed
of certain of its golf ball manufacturing assets and therefore
incurred non-cash charges to earnings in the amount of $24.1
million. On January 22, 2004, the Company announced that in
2004 it expects to incur additional charges of approximately
$35.0 million as it continues to consolidate its operations.
These additional charges are expected to include non-cash
charges for the disposal of additional assets and cash charges for
severance and facility consolidations.
The Company’s 2003 results of operations include The Top-
Flite Golf Company results beginning September 15, 2003.
Results of Operations
Years Ended December 31, 2003 and 2002
Net sales increased 3% to $814.0 million for the year ended
December 31, 2003, as compared to $793.2 million for the year
ended December 31, 2002. The overall increase in net sales is
primarily due to a $31.3 million (28%) increase in the sales of
putters, a $28.2 million (12%) increase in the sales of irons, a
$12.4 million (19%) increase in the sales of golf balls and a
$6.5 million (10%) increase in the sales of accessories and
other products as compared to 2002. The increase in golf ball
sales is attributable to the addition of Top-Flite golf ball sales.
The aggregate increases in net sales were partially offset by a
$57.6 million (19%) decrease in sales of woods in 2003 as com-
pared to 2002. In addition, as compared to 2002, the
Company’s