Callaway 1998 Annual Report Download - page 26

CALLAWAY GOLF COMPANY
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the Company had approximately $11,543,000,
$2,575,000 and $5,774,000, respectively, of foreign
exchange contracts outstanding. The contracts outstand-
ing at December 31, 1998 mature between January and
June of 1999. The Company had net realized and unre-
alized gains on foreign exchange contracts of $57,000
and $261,000 in 1998 and 1997, respectively, and net
realized and unrealized losses of $521,000 in 1996.
In June 1998, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting
for Derivative Instruments and Hedging Activities.”
This statement establishes accounting and reporting
standards for derivative instruments and hedging activi-
ties and requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and mea-
sure 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 of hedges. SFAS No. 133 is effective for all periods
beginning after June 15, 1999; the Company has elect-
ed to early adopt SFAS No. 133 on January 1, 1999.
Adoption of this statement does not significantly
affect the way in which the Company currently accounts
for derivatives to hedge payments due on intercompany
transactions, as described above. Accordingly, no cumu-
lative-effect-type adjustments will be made. However,
the Company expects that it also may hedge anticipated
transactions denominated in foreign currencies using
forward foreign currency exchange rate contracts and
put or call options, which may be combined to form
range forwards. The forward contracts used to hedge
anticipated transactions will be recorded as either assets
or liabilities in the balance sheet at fair value. Gains and
losses on such contracts will be recorded in other com-
prehensive income and will be recorded in income when
the anticipated transaction occurs. The ineffective por-
tion of all hedges will be recognized in current period
earnings. Due to its current and expected future limited
use of derivative instruments, the Company does not
expect that the adoption of SFAS No. 133 will have a
material impact on its results of operations or financial
position.
Earnings per Common Share
Basic earnings per common share is calculated by divid-
ing net income for the period by the weighted-average
number of common shares outstanding during the
period. Diluted earnings per common share is calculat-
ed by dividing net income for the period by the weight-
ed-average number of common shares outstanding dur-
ing the period, increased by dilutive potential common
shares (“dilutive securities”) that were outstanding dur-
ing the period. Dilutive securities include shares owned
by the Callaway Golf Company Grantor Stock Trust
(Note 5), options issued pursuant to the Company’s
stock option plans (Note 7), potential shares related to
the Employee Stock Purchase Plan (Note 7) and rights
to purchase preferred shares under the Callaway Golf
Company Shareholder Rights Plan (Note 7). 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 common 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, 1998, 1997 and 1996 is presented
in Note 6.
Cash Equivalents
Cash equivalents are highly liquid investments pur-
chased with maturities of three months or less.
The acquisition of substantially all of the assets and
certain liabilities of Odyssey Sports, Inc. (Note 13) and
the repurchase and retirement of certain of the
Company’s outstanding Common Stock necessitated
the sale of certain held-to-maturity debt securities with
amortized costs of $115,428,000 and $31,805,000,
respectively, during 1997. These securities were pur-
chased at a discount and were sold within two weeks to
two months of their respective stated maturity dates. As
such, the securities are considered to be sold at maturity
under the provisions of SFAS No. 115 “Accounting for
Certain Investments in Debt and Equity Securities.” No
realized or unrealized gains or losses resulted from the
sales of these securities.