Callaway 2003 Annual Report Download - page 50

CALLAWAY GOLF COMPANY 47
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined
using the first-in, first-out (FIFO) method. Inventories
include material, labor and manufacturing overhead costs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over estimated useful lives as follows:
Buildings and improvements 10-30 years
Machinery and equipment 5-15 years
Furniture, computers and equipment 3-5 years
Production molds 2 years
Normal repairs and maintenance costs are expensed as incurred.
Expenditures that materially increase values, change capacities
or extend useful lives are capitalized. Replacements are capitalized
and the property, plant, and equipment accounts are relieved of
the items being replaced. The related costs and accumulated
depreciation of disposed assets are eliminated and any resulting
gain or loss on disposition is included in income. Construction in
process consists primarily of store display equipment not yet
assembled and installed, in-process internally developed software
and unfinished molds that have not yet been placed in service.
In accordance with Statement of Position 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use,” the Company capitalizes certain costs incurred in
connection with developing or obtaining internal use software.
Costs incurred in the preliminary project stage are expensed. All
direct external costs incurred to develop internal-use software
during the development stage are capitalized and amortized
using the straight-line method over the remaining estimated
useful lives. Costs such as maintenance and training are
expensed as incurred.
In August 2002, the Company purchased previously leased
manufacturing equipment utilized in the Company’s golf ball
operations. In December 1998, the Company entered into a
master lease agreement for the acquisition and lease of golf ball
equipment. By December 31, 1999, the Company had finalized
its lease program and leased $50,000,000 of equipment under
the operating lease. On February 11, 2002, pursuant to the
master lease agreement, the Company notified the lessor of its
election to purchase the leased equipment in August 2002
which was the end of the initial lease term. During the third
quarter of 2002, pursuant to the master lease agreement and
the Company’s February 11, 2002 notice, the Company paid
$50,800,000 in full satisfaction of the purchase price of the
leased equipment and recorded the $48,500,000 estimated fair
value of the equipment in fixed assets. The estimated fair value
of the equipment was based on an independent appraisal. The
actual purchase price was dependent in part upon interest rates
on the date of purchase. Due to a decline in interest rates, the
actual purchase price exceeded the estimated fair value of the
equipment. Therefore, in 2002, a charge of $2,300,000 was
recorded in cost of sales.
During the fourth quarter of 2003, in connection with the Top-
Flite
Acquisition (Note 3), the Company began consolidating
the Callaway Golf and Top-Flite golf club and golf ball
man
ufacturing and research and development operations. In
connection with this consolidation, the Company disposed of
certain long-lived assets. As a result, the Company reduced the
carrying value of its golf ball assets and therefore incurred
pre-tax charges to earnings in the amount of $24,080,000.
Long-Lived Assets
In accordance with Financial Accounting Standards Board
(“FASB”) issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the Company
assesses potential impairments of its long-lived assets whenever
events or changes in circumstances indicate that the asset’s
carrying value may not be recoverable. An impairment loss
would be recognized when the carrying amount of a long-lived
asset or asset group is not recoverable and exceeds its fair value.
The carrying amount of a long-lived asset or asset group is not
recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition
of the asset or asset group.
Goodwill and Intangible Assets
Goodwill and intangible assets consist of goodwill, trade name,
trademark, trade dress, patents and other intangible assets
acquired during the Odyssey Sports, Inc. acquisition, the Top-
Flite Golf Company Acquisition and the acquisition of certain