Callaway 2001 Annual Report Download - page 46

Callaway Golf Company
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NOTE 1
The Company
Callaway Golf Company (“Callaway Golf” or the “Company”) was incor-
porated in California in 1982 and was reincorporated in Delaware in
1999. The Company designs, develops, manufactures and markets high-
quality, innovative golf clubs, golf balls and golf accessories. Callaway
Golf’s primary products for the periods presented include Great Big
Bertha Hawk Eye and Big Bertha Hawk Eye VFT Titanium Metal Woods,
ERC and ERC II Forged Titanium Drivers, Big Bertha Steelhead Plus and
Big Bertha Steelhead Metal Woods, Great Big Bertha Hawk Eye and Great
Big Bertha Hawk Eye VFT Tungsten Injected Titanium Irons, Steelhead X-
14 and Big Bertha X-12 Irons, Odyssey putters and wedges, Rule 35 and
CB1 golf balls, golf bags and other golf accessories.
NOTE 2
Significant Accounting Policies
Principles of Consolidation The consolidated financial statements for the
periods presented include the accounts of the Company and its subsidiaries,
Callaway Golf Sales Company, Golf Funding Corporation (“Golf Funding”),
Callaway Golf Ball Company, Odyssey Golf, Inc. (“Odyssey”), CGV, Inc.,
Callaway Golf Media Ventures (“CGMV”), Callaway Golf Europe Ltd.,
Callaway Golf Europe, S.A., Callaway Golf K.K. (formerly named ERC
International Company), Callaway Golf (Germany) GmbH, Callaway Golf
Canada Ltd., Callaway Golf Korea, Ltd., Callaway Golf South Pacific PTY Ltd.
and Callaway Golf Company Grantor Stock Trust. All significant intercompa-
ny transactions and balances have been eliminated. Callaway Golf Ball
Company and Odyssey were merged with the Company as of December 29,
2000 and December 22, 1999, respectively. The Company sold its interest in
CGMV in March 1999 in an effort to discontinue certain initiatives not direct-
ly associated with the Company’s core business (Note 12). Callaway Golf
Europe, S.A. was merged with Callaway Golf Europe Ltd. in 1999 (Note 13).
Use of Estimates The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and lia-
bilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Examples of such esti-
mates include provisions for warranty, uncollectible accounts receivable,
inventory obsolescence, restructuring costs and market value estimates of
derivative instruments. Actual amounts could differ from those estimates.
Revenue Recognition Sales are recognized net of an allowance for sales
returns when both title and risk of loss transfer to the customer. The
Company adopted Staff Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements” (“SAB No. 101”) in the fourth quarter of 2000 with
an effective date of January 1, 2000. SAB No. 101 summarizes the Securities
and Exchange Commission (“SEC”) Staff’s views in applying generally
accepted accounting principles to revenue recognition in financial state-
ments. As a result of the adoption of SAB No. 101, the Company recognized
a cumulative effect adjustment of $957,000 in the Consolidated Statement of
Operations for the year ended December 31, 2000 to reflect the change in the
Company’s revenue recognition policy from shipping point to the time both
legal and practical risk of loss transfers to the customer.
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.
Warranty Policy The Company’s warranty policy provides two-year limited
coverage for golf clubs following the date of purchase. The Company’s policy
is to accrue the estimated cost of warranty coverage at the time the sale is
recorded. In estimating its future warranty obligations the Company consid-
ers various relevant factors, including the Company’s stated warranty policies
and practices, the historical frequency of claims, and the cost to replace or
repair its products under warranty. During 2001, 2000 and 1999, the
Company recorded a warranty provision of $9,527,000, $17,675,000 and
$18,023,000, respectively.
Fair Value of Financial Instruments The Company’s financial instruments
consist of cash and cash equivalents, marketable securities, trade receivables
and payables, forward foreign currency exchange contracts (Note 6), its
revolving line of credit and note payable (Note 4) and its accounts receivable
securitization facility (Note 5). The carrying amounts of these instruments
approximate fair value because of their short-term maturities and variable
interest rates. During 2001, the Company also entered into an energy con-
tract accounted for as a derivative instrument that has been recorded based
on estimated fair values (see Notes 6 and 11).
Advertising Costs The Company advertises primarily through television
and print media. The Company’s policy is to expense advertising costs,
including production costs, as incurred. Advertising expenses for 2001, 2000
and 1999 were $44,707,000, $35,100,000 and $26,202,000, respectively.
Research and Development Costs Research and development costs are
expensed as incurred.
Foreign Currency Translation and Transactions The Company’s foreign
subsidiaries utilize their local currency as their functional currency. The
accounts of these foreign subsidiaries have been translated into United States
dollars at appropriate rates of exchange using the current rate method.
Cumulative translation gains or losses are recorded as accumulated other
comprehensive income in shareholders’ equity. Gains or losses resulting from
transactions that are made in a currency different from the functional cur-
rency are recognized in earnings as they occur or, for hedging contracts,
when the underlying hedged transaction affects earnings. The Company
recorded transaction gains of $2,533,000 in 2001 and transaction losses of
$147,000 and $793,000 in 2000 and 1999, respectively, included in interest
and other income, net.
Derivatives and Hedging In June 1998, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities” as amended by SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities.” As amended, SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Changes in the fair value of derivatives are recorded each peri-
od in income or other comprehensive income, depending on whether the
Notes to Consolidated Financial Statements