Callaway 2001 Annual Report Download - page 48

Callaway Golf Company
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In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 142 requires the use of a non-amortization approach to
account for goodwill and other intangible assets with indefinite lives. Goodwill
and other intangible assets with indefinite lives existing at June 30, 2001 are no
longer amortized effective January 1, 2002. Goodwill and other intangible assets
with indefinite lives acquired on or after July 1, 2001 follow the non-amortiza-
tion approach under SFAS No. 142. Under the non-amortization approach,
goodwill and other intangible assets with indefinite lives are tested for impair-
ment, rather than amortized to earnings. In addition, SFAS No. 142 requires
that acquired intangible assets be separately identified and amortized over their
individual useful lives. The Company adopted the amortization provisions of
SFAS No. 142 effective January 1, 2002. At December 31, 2001, the carrying
value of unamortized goodwill, intangible assets with indefinite lives, and other
intangible assets was $16,846,000, $88,590,000 and $15,877,000, respectively.
Intangible assets with indefinite lives consist of trade name, trademark and
trade dress and goodwill. In accordance with SFAS No. 142, the goodwill and
other intangible assets with indefinite lives that were being amortized over peri-
ods ranging from five to 40 years follow the non-amortization approach effec-
tive January 1, 2002. Patents and other intangible assets are amortized using the
straight-line method over periods ranging from three to sixteen years (Note 3).
Stock-Based Compensation The Company measures compensation
expense for its stock-based employee compensation awards using the intrin-
sic value method. Pro forma disclosures of net income and earnings per
share, as if the fair value-based method had been applied in measuring stock-
based employee compensation expense, are presented in Note 8.
Compensation expense for non-employee stock-based compensation awards
is measured using the fair-value method.
Income Taxes Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or lia-
bility is established for the expected future consequences resulting from tem-
porary differences in the financial reporting and tax bases of assets and lia-
bilities. Deferred income tax expense (benefit) is the net change during the
year in the deferred income tax asset or liability.
Deferred taxes have not been provided on the cumulative undistributed
earnings of foreign subsidiaries since such amounts are expected to be rein-
vested indefinitely. The Company provides a valuation allowance for its
deferred tax assets when, in the opinion of management, it is more likely than
not that such assets will not be realized.
Interest and Other Income, Net Interest and other income, net includes
royalty income, gains and losses on foreign currency transactions, interest
income, gains on the sale of marketable securities and losses generated from
the sale of the Company’s excess energy supply. Gains and losses are pre-
sented as a net amount for foreign currency and excess energy sales transac-
tions. Also included in other income during 1999 were net proceeds from an
insurance policy related to the deferred compensation plan of $3,622,000
(Note 9). The components of interest and other income, net are as follows:
(in thousands) Year Ended December 31,
2001 2000 1999
Royalty income $ 3,231 $ 2,669 $ 1,058
Net foreign currency gains (losses) 2,533 (147) (793)
Interest income 1,462 6,157 5,462
Gain on sale of securities 1,597 57 36
Net losses on excess energy sales (2,052) — —
Net proceeds from insurance policy — — 3,622
Other 378 55 (203)
$ 7,149 $ 8,791 $ 9,182
Comprehensive Income SFAS No. 130, “Reporting Comprehensive Income,”
requires that all components of comprehensive income be reported in the
financial statements in the period in which they are recognized. The compo-
nents of comprehensive income for the Company include net income, unreal-
ized gains or losses on cash flow hedges and foreign currency translation
adjustments. Since the Company has met the indefinite reversal criteria, it does
not accrue income taxes on foreign currency translation adjustments. During
2001, the Company recorded $4,994,000, net of tax expense of $3,055,000,
related to net unrealized gains on cash flow hedges. No amounts were reclassi-
fied to earnings during 2001 as a result of discontinuance of any cash flow hedges.
Segment Information The Company utilizes the management approach to
report segment information. The Company’s operating segments are organ-
ized on the basis of products and include golf clubs and golf balls. The
Company also discloses information about geographic areas. This informa-
tion is presented in Note 14.
Diversification of Credit Risk The Company’s financial instruments that
are subject to concentrations of credit risk consist primarily of cash equiva-
lents, marketable securities and trade receivables.
The Company may invest its excess cash in money market accounts and U.S.
Government securities and has established guidelines relative to diversifica-
tion and maturities in an effort to maintain safety and liquidity. These guide-
lines are periodically reviewed and modified to take advantage of trends in
yields and interest rates.
The Company operates in the golf equipment industry and primarily sells its
products to golf equipment retailers, directly and through wholly-owned
domestic and foreign subsidiaries, and to foreign distributors. The Company
performs ongoing credit evaluations of its customers’ financial condition and
generally requires no collateral from these customers. The Company main-
tains reserves for potential credit losses, which it considers adequate to cover
any such losses.
During 2001, 2000 and 1999, approximately 46%, 46% and 42%, respective-
ly, of the Company’s net sales were made to foreign customers. An adverse
change in either economic conditions abroad or in the Company’s relation-
ship with significant foreign retailers could negatively impact the volume of
the Company’s international sales and the Company’s results of operations,
cash flows and financial position.
The Company enters into forward exchange rate contracts and put or call
options for the purpose of hedging foreign exchange rate exposures on exist-
ing or anticipated transactions. In the event of a failure to honor one of these
contracts by one of the banks with which the Company has contracted, man-
agement believes any loss would be limited to the exchange rate differential
from the time the contract was made until the time it was compensated.
During the second quarter of 2001, the Company entered into a long-term,
fixed-price, fixed-capacity, energy supply contract as part of a comprehensive
strategy to ensure the uninterrupted supply of energy while capping electric-
ity costs in the volatile California energy market. During the fourth quarter
of 2001, the energy supplier filed for bankruptcy protection and the
Company notified the energy supplier that, among other things, the energy
supplier was in default of the energy supply contract and that based upon
such default, and for other reasons, the Company was terminating the ener-
gy supply contract. As a result, the Company began procuring energy from
an alternative source at current market rates.