Callaway 1998 Annual Report Download - page 25

CALLAWAY GOLF COMPANY
23
NOTE 1
THE COMPANY
Callaway Golf Company (“Callaway Golf” or the
“Company”) is a California corporation formed in
1982. The Company designs, develops, manufactures
and markets high-quality, innovative golf clubs.
Callaway Golf’s primary products include Big Bertha®
metal woods with the War Bird®soleplate, Great Big
Bertha®titanium metal woods, Biggest Big Bertha®tita-
nium drivers, Big Bertha®Steelhead™metal woods, Big
Bertha®irons, Great Big Bertha®Tungsten• Titanium™
irons, Big Bertha®X-12™irons, Odyssey®putters and
wedges and various other putters.
NOTE 2
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its subsidiaries, Callaway
Golf Sales Company, Callaway Golf Ball Company,
Odyssey Golf, Inc. (“Odyssey”), CGV, Inc., All-
American Golf LLC (“All-American”), Callaway Golf
Media Ventures (“CGMV”), Callaway Golf Europe
Ltd., ERC International Company, Callaway Golf
(Germany) GmbH, Callaway Golf Canada Ltd.,
Callaway Golf Korea Ltd. and Callaway Golf Europe,
S.A. All significant intercompany transactions and bal-
ances have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Examples of such estimates include provisions for war-
ranty, uncollectible accounts receivable, inventory obso-
lescence and restructuring costs (Note 11). Actual results
could differ from those estimates, which could material-
ly affect future results of operations.
Revenue Recognition
Sales are recognized at the time goods are shipped, net of
an allowance for sales returns.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash
and cash equivalents, trade receivables and payables,
forward foreign currency exchange contracts, its revolv-
ing line of credit and note payable (Note 4). The carry-
ing amounts of these instruments approximate fair
value because of their short maturities and variable
interest rates.
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 1998, 1997 and 1996
were $32,944,000, $20,320,000 and $18,321,000,
respectively.
Foreign Currency Translation and Transactions
The accounts of the Company’s foreign subsidiaries have
been translated into United States dollars at appropriate
rates of exchange. Cumulative translation gains or losses
are recorded as accumulated other comprehensive
income in shareholders’ equity. Gains or losses resulting
from foreign currency transactions (transactions denom-
inated in a currency other than the entity’s local curren-
cy) are included in the consolidated statement of opera-
tions. The Company recorded transaction gains of
$1,598,000 in 1998 and transaction losses of $940,000
in 1997. The amounts recorded as a result of foreign
currency transactions in 1996 were not material.
During 1998, 1997 and 1996, the Company
entered into forward foreign currency exchange rate
contracts to hedge payments due on intercompany
transactions by one of its wholly-owned foreign sub-
sidiaries, Callaway Golf Europe Ltd. Realized and unre-
alized gains and losses on these contracts are recorded in
income. The effect of this practice is to minimize vari-
ability in the Company’s operating results arising from
foreign exchange rate movements. The Company does
not engage in foreign currency speculation. These for-
eign exchange contracts generally do not subject the
Company to risk due to exchange rate movements
because gains and losses on these contracts offset losses
and gains on the intercompany transactions being
hedged, and the Company does not engage in hedging
contracts which exceed the amount of the intercompany
transactions. At December 31, 1998, 1997 and 1996,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS