Callaway 2000 Annual Report Download - page 35

Callaway Golf Company | 35
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 period in income or other comprehensive income, depending
on whether the derivatives are designated as hedges and, if so,
the types and effectiveness of hedges. SFAS No. 133 is effective
for all periods beginning after June 15, 2000; the Company
elected to adopt early SFAS No. 133 on January 1, 1999.
Adoption of this statement did not significantly affect the way
in which the Company currently accounts for derivatives to hedge
payments due on intercompany transactions, as described in
Note 6. Accordingly, no cumulative effect adjustments were made.
In the fourth quarter of 2000, the Company began hedging antic-
ipated intercompany sales of inventory denominated in foreign
currencies using forward foreign currency exchange rate contracts.
The purpose of these derivative instruments is to minimize the
variability of cash flows associated with the anticipated transac-
tions being hedged. As changes in foreign currency rates impact
the United States dollar value of anticipated transactions, the fair
value of the forward contracts also changes, providing a synthetic
offset to foreign currency rate fluctuations.
The forward contracts used to hedge anticipated transactions
are cash flow hedges and are recorded as either assets or liabili-
ties in the balance sheet at fair value. Gains and losses on such
contracts are recorded in other comprehensive income and will be
recorded in income when the anticipated transactions occur. The
ineffective portion of all hedges are recognized in current period
earnings.
Additional information about the Company’s use of derivative
instruments is presented in Note 6.
Earnings per Common Share
Basic earnings per common share is calculated by dividing net
income for the period by the weighted-average number of common
shares outstanding during the period. Diluted earnings per common
share is calculated by dividing net income for the period by the
weighted-average number of common shares outstanding during
the period, increased by dilutive potential common shares (“dilu-
tive securities”) that were outstanding during the period. Dilutive
securities include shares owned by the Callaway Golf Company
Grantor Stock Trust (Note 8), options issued pursuant to the
Company’s stock option plans (Note 10), potential shares related to
the Employee Stock Purchase Plan (Note 10) and rights to purchase
preferred shares under the Callaway Golf Company Shareholder
Rights Plan (Note 10). Dilutive securities related to the Callaway
Golf Company Grantor Stock Trust and the Company’s stock option
plans are included in the calculation of diluted earnings per com-
mon share using the treasury stock method. Dilutive securities
related to the Employee Stock Purchase Plan are calculated by
dividing the average withholdings during the period by 85% of the
lower of the offering period price or the market value at the end of
the period. The dilutive effect of rights to purchase preferred shares
under the Callaway Golf Shareholder Rights Plan have not been
included as dilutive securities because the conditions necessary to
cause these rights to be redeemed were not met. A reconciliation of
the numerators and denominators of the basic and diluted earnings
per common share calculations for the years ended December 31,
2000, 1999 and 1998 is presented in Note 9.
Cash Equivalents
Cash equivalents are highly liquid investments purchased with
maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
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 of two to 30 years. The
Company’s property, plant and equipment generally are depreci-
ated over the following periods:
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 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.
The Company capitalizes certain software development and
implementation costs for internal use. Development and imple-
mentation costs are expensed until management has determined
that the software will result in probable future economic benefit
and management has committed to funding the project.
Thereafter, all direct external implementation costs, as well as
purchased software costs, are capitalized and amortized using the
straight-line method over the remaining estimated useful lives.
In September 2000, the Company completed an extensive
upgrade of its enterprise-wide business software system to a more