Callaway 2007 Annual Report Download - page 88

The total origination fees incurred in connection with the Line of Credit, including fees incurred in
connection with the amendments, were $2,130,000 and are being amortized into interest expense over the
remaining term of the Line of Credit agreement. Unamortized origination fees were $1,183,000 as of
December 31, 2007, of which $282,000 was included in prepaid and other current assets and $901,000 in other
long-term assets in the accompanying consolidated condensed balance sheet.
Note 8. Derivatives and Hedging
The Company from time to time uses derivative financial instruments to manage its exposure to foreign
currency exchange rates. The derivative instruments are accounted for pursuant to SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 138 and 149, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 155, “Accounting for Certain
Hybrid Financial Instruments.” As amended, SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet, measure those instruments at fair value and recognize changes in
the fair value of derivatives in earnings in the period of change unless the derivative qualifies as an effective
hedge that offsets certain exposures.
Foreign Currency Exchange Contracts
The Company from time to time enters into foreign exchange contracts to hedge against exposure to
changes in foreign currency exchange rates. Such contracts are designated at inception to the related foreign
currency exposures being hedged, which may include anticipated intercompany sales of inventory denominated
in foreign currencies, payments due on intercompany transactions from certain wholly owned foreign
subsidiaries, and anticipated sales by the Company’s wholly owned European subsidiary for certain Euro-
denominated transactions. Hedged transactions are denominated primarily in British Pounds, Euros, Japanese
Yen, Korean Won, Canadian Dollars and Australian Dollars. To achieve hedge accounting, contracts must reduce
the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures
and comply with established risk management policies. Pursuant to its foreign exchange hedging policy, the
Company may hedge anticipated transactions and the related receivables and payables denominated in foreign
currencies using forward foreign currency exchange rate contracts and put or call options. Foreign currency
derivatives are used only to meet the Company’s objectives of minimizing variability in the Company’s
operating results arising from foreign exchange rate movements which may include derivatives that do not meet
the criteria for hedge accounting. The Company does not enter into foreign exchange contracts for speculative
purposes. Hedging contracts mature within twelve months from their inception.
At December 31, 2007, 2006 and 2005, the notional amounts of the Company’s foreign exchange contracts
used to hedge outstanding balance sheet exposures were approximately $31,095,000, $32,470,000 and
$35,624,000, respectively. The Company estimates the fair values of derivatives based on quoted market prices
or pricing models using current market rates, and records all derivatives on the balance sheet at fair value with
changes in fair value recorded in the statement of operations. At December 31, 2007, the fair values of foreign
currency-related derivatives were recorded as current liabilities of $421,000. At December 31, 2006, the fair
values of foreign currency-related derivatives were recorded as current assets of $219,000 and current liabilities
of $58,000. The gains and losses on foreign currency contracts used to manage balance sheet exposures are
recognized as a component of other income (expense) in the same year as the remeasurement gain and loss of the
related foreign currency denominated assets and liabilities and thus generally offset these gains and losses.
During 2007 and 2006, the Company recorded net losses of $5,979,000 and $2,064,000, respectively, and during
2005, a net gain of $4,222,000, due to net realized and unrealized gains and losses on contracts used to manage
balance sheet exposures that do not qualify for hedge accounting. These net realized and unrealized contractual
gains and losses are used by the Company to offset actual foreign currency transactional net gains of $6,137,000
and 2,315,000 as of December 31, 2007 and 2006, respectively, and transactional net losses of $6,663,000 as of
December 31, 2005. At December 31, 2007, 2006 and 2005, there were no foreign exchange contracts designated
as cash flow hedges.
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