Callaway 1999 Annual Report Download - page 35

33CALLAWAY GOLF COMPANY
December 31, 1999 mature between January and June of 2000.
The Company had net realized and unrealized gains on foreign
exchange contracts of $358,000, $57,000 and $261,000 in
1999, 1998 and 1997, respectively.
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 hedg-
ing activities and requires that an entity recognize all deriva-
tives 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 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 above. Accordingly, no cumulative effect adjust-
ments were made. However, the Company expects that it also
may hedge anticipated transactions denominated in foreign
currencies using forward foreign currency exchange rate con-
tracts and put or call options. 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 comprehen-
sive income and will be recorded in income when the antici-
pated transactions occur. The ineffective portion of all hedges
will be recognized in current period earnings.
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 earn-
ings 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 (“dilutive securities”) that were outstanding
during the period. Dilutive securities include shares owned by
the Callaway Golf Company Grantor Stock Trust (Note 6),
options issued pursuant to the Company’s stock option plans
(Note 8), potential shares related to the Employee Stock
Purchase Plan (Note 8) and rights to purchase preferred
shares under the Callaway Golf Company Shareholder Rights
Plan (Note 8). 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 secu-
rities related to the Employee Stock Purchase Plan are calcu-
lated 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 earn-
ings per common share calculations for the years ended
December 31, 1999, 1998 and 1997 is presented in Note 7.
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 accumu-
lated 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 general-
ly are depreciated 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 2years
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. Development and implementation
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, not exceeding five years.