Callaway 2004 Annual Report Download - page 25

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(6) For 2001, the Company's net income and earnings per common share include the recognition of unrealized
energy contract losses due to changes in the estimated fair value of the energy contract based on market
rates. During the second and third quarters of 2001, the Company recorded $6.4 million and $7.8 million,
respectively, of after-tax unrealized losses. During the fourth quarter of 2001, the Company terminated the
energy contract. As a result, the Company will continue to reÖect the derivative valuation account on its
balance sheet with no future valuation adjustments for changes in market rates, subject to periodic review
(see Note 13 to the Consolidated Financial Statements).
(7) The Company adopted StaÅ Accounting Bulletin No. 101, ""Revenue Recognition in Financial State-
ments'' (""SAB No. 101'') in the fourth quarter of 2000 with an eÅective date of January 1, 2000. As a
result of the adoption of SAB No. 101, the Company recognized a cumulative eÅect adjustment of
$1.0 million in the Consolidated Statement of Operations for the year ended December 31, 2000 to reÖect
the change in the Company's revenue recognition policy to recognize revenue at the time both legal and
practical risk of loss transfers to the customer (see Note 2 to the Consolidated Financial Statements).
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the
related notes and the ""Important Notice to Investors'' that appear elsewhere in this report.
Regulation G Disclosure
The Company's discussion and analysis of its results of operations, Ñnancial condition and liquidity set
forth in this Item 7 have been derived from Ñnancial statements prepared in accordance with accounting
principles generally accepted in the United States (""GAAP''). In addition to the GAAP results of operations,
the Company has also provided additional information concerning the Company's results that includes certain
Ñnancial measures not prepared in accordance with GAAP. The non-GAAP Ñnancial measures included in
this discussion are pro forma gross proÑt, net income and earnings per share amounts that exclude from 2003
charges associated with the integration of the Top-Flite business and from 2002 the adjustment to the
Company's warranty reserve. These non-GAAP Ñnancial measures should not be considered a substitute for
any measure derived in accordance with GAAP. These non-GAAP Ñnancial measures may also be
inconsistent with the manner in which similar measures are derived or used by other companies. Management
believes that the presentation of such non-GAAP Ñnancial measures, when considered in conjunction with the
most directly comparable GAAP Ñnancial measures, provides useful information to investors by permitting
additional relevant period-over-period comparisons of the historical operations of the Callaway Golf business.
The Company has included in this discussion supplemental information which reconciles those non-GAAP
Ñnancial measures to the most directly comparable Ñnancial measures prepared in accordance with GAAP.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its results of operations, Ñnancial condition and liquidity are
based upon the Company's consolidated Ñnancial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these Ñnancial statements
requires the Company to make estimates and judgments that aÅect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements and the
reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may materially diÅer from these estimates under diÅerent assumptions or
conditions. On an on-going basis, the Company reviews its estimates to ensure that the estimates appropriately
reÖect changes in its business or as new information becomes available.
16