Callaway 2003 Annual Report Download - page 63

60 CALLAWAY GOLF COMPANY
reasons, the Company was terminating the energy supply
contract. As a result, the Company adjusted the estimated
fair value of this contract through the date of termination. As
the contract is terminated and neither party to the contract is
performing pursuant to the terms of the contract, the termi-
nated contract ceased to represent a derivative instrument in
accordance with SFAS No. 133. The Company, therefore, no
longer records future valuation adjustments for changes in
electricity rates. The Company continues to reflect the
derivative valuation account on its balance sheet, subject to
periodic review, in accordance with SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.” Any non-cash unrealized
gains to be recognized upon extinguishment of the derivative
valuation account would be reported as non-operating
income.
As of the date of termination of the energy supply contract,
the derivative valuation account reflected $19,922,000 of
unrealized losses resulting from changes in the estimated fair
value of the contract. The fair value of the contract was
esti
mated at the time of termination based on market prices
of electricity for the remaining period covered by the contract.
The net differential between the contract price and estimated
market prices for future periods was applied to the volume
stipulated in the contract and discounted on a present-value
basis to arrive at the estimated fair value of the contract at
the time of termination. The estimate was highly subjective
because quoted market rates directly relevant to the
Company’s local energy market and for periods extending
beyond a 10- to 12-month horizon were not quoted on a
traded market. In making the estimate, the Company instead
had to rely upon near-term market quotations and other
market information to determine an estimate of the fair
value of the contract. In management’s opinion, there are no
available contract valuation methods that provide a reliable
single measure of the fair value of the energy derivative
because of the lack of quoted market rates directly relevant
to the terms of the contract and because changes in subjective
input assumptions can materially affect the fair value estimates.
See Note 13 for a discussion of contingencies related to the
termination of the Company’s derivative energy supply contract.
Note 9. Earnings Per Common Share
The schedule below summarizes the elements included in the
calculation of basic and diluted earnings per common share for
the years ended December 31, 2003, 2002 and 2001.
Years Ended December 31,
(In thousands,except per-share data) 2003 2002 2001
Net income $ 45,523 $ 69,446 $ 58,375
Weighted-average shares outstanding:
Weighted-average shares
outstanding — Basic 66,027 66,517 69,809
Dilutive securities 444 757 1,505
Weighted-average shares
outstanding — Diluted 66,471 67,274 71,314
Earnings per common share:
Basic $ 0.69 $ 1.04 $ 0.84
Diluted $ 0.68 $ 1.03 $ 0.82
For the years ended December 31, 2003, 2002 and 2001,
options outstanding totaling 10,606,000 shares, 14,177,000
shares and 8,943,000 shares, respectively, were excluded from
the calculations of earnings per common share, as their effect
would have been antidilutive.
Note 10. Stock, Stock Options and Rights
Common Stock and Preferred Stock
The Company has an authorized capital of 243,000,000 shares,
$.01 par value, of which 240,000,000 shares are designated
Common Stock, and 3,000,000 shares are designated Preferred
Stock. Of the Preferred Stock, 240,000 shares are designated Series
A Junior Participating Preferred Stock in connection with the
Company’s shareholders’ rights plan (see Shareholders’ Rights Plan
below). The remaining shares of Preferred Stock are undesignated
as to series, rights, preferences, privileges or restrictions.
The holders of Common Stock are entitled to one vote for each
share of Common Stock on all matters submitted to a vote of the
Company’s shareholders. Although to date no shares of Series A
Junior Participating Preferred Stock have been issued, if such
shares were issued, each share of Series A Junior Participating
Preferred Stock would entitle the holder thereof to 1,000 votes on
all matters submitted to a vote of the shareholders of the Company.
The holders of Series A Junior Participating Preferred Stock and the
holders of Common Stock shall generally vote together as one class
on all matters submitted to a vote of the Company’s shareholders.
Shareholders entitled to vote for the election of directors are
entitled to vote cumulatively for one or more nominees.