Callaway 2003 Annual Report Download - page 49

46 CALLAWAY GOLF COMPANY
is to minimize the variability of cash flows associated with the
anticipated transactions being hedged. As changes in foreign
currency rates impact the United States dollar value of antici-
pated transactions, the fair value of the forward contracts also
changes, offsetting foreign currency rate fluctuations. 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.
During the second quarter of 2001, the Company entered into a
derivative commodity instrument as part of a comprehensive
strategy to ensure the uninterrupted supply of electricity while
capping electricity costs in the volatile California energy market.
Additional information about the Company’s use of derivative
instruments is presented in Notes 8 and 13.
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 potentially dilutive
common shares (“dilutive securities”) that were outstanding
during the period. Dilutive securities include shares owned by
the Callaway Golf Company Grantor Stock Trust, options granted
pursuant to the Company’s stock option plans, potential shares
related to the Employee Stock Purchase Plan 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 common share using the treasury stock
method. Under the treasury stock method, the dilutive securities
related to the Callaway Golf Company Grantor Stock Trust do
not have any impact upon the diluted earnings per common
share. 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 exercisable were not met. A reconciliation of the numer-
ators and denominators of the basic and diluted earnings per
common share calculations for the years ended December 31,
2003, 2002 and 2001 is presented in Note 9.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with
original maturities of three months or less.
Marketable Securities and Other Investments
The Company determines the appropriate classification of its
investments at the time of acquisition and reevaluates such
determination at each balance sheet date. Trading securities are
carried at quoted fair value, with unrealized gains and losses
included in earnings. Available-for-sale securities are carried at
quoted fair value, with unrealized gains and losses reported in
shareholders’ equity as a component of accumulated other
comprehensive income. Investments in limited partnerships
that do not have readily determinable fair values are stated at
cost and are reported in other assets. Realized gains and losses
are determined using the specific identification method and are
included in interest and other income, net.
The Company held no marketable securities at December 31,
2003. Marketable securities at December 31, 2002 were
$26,000 and consisted primarily of investments in public
corporations, which are classified as available-for-sale securities
within other assets. Proceeds from the sale of available-for-sale
securities for the years ended December 31, 2003 and 2002
were $24,000 and $6,998,000, respectively. There were no
proceeds in 2001. For the year ended December 31, 2003, the
Company recorded a realized loss on available-for-sale securities
sold of $93,000. For the years ended December 31, 2002 and
2001, the Company recorded $95,000 and $1,597,000, respec-
tively, of realized gains on available-for-sale securities sold and
unrealized and realized gains on trading securities in interest
and other income, net.