Callaway 2000 Annual Report Download - page 38

Callaway Golf Company | 38
Note 4
BANK LINE OF CREDIT AND NOTE PAYABLE
In February 1999, the Company consummated the amendment of
its credit facility to increase the facility to up to $120,000,000 (the
“Amended Credit Agreement”). The Amended Credit Agreement
expires in February 2004 and is secured by substantially all of the
assets of the Company. The Amended Credit Agreement bears inter-
est at the Company’s election at the London Interbank Offering
Rate (“LIBOR”) plus a margin or the higher of the base rate on cor-
porate loans at large U.S. money center commercial banks (prime
rate), or the Federal Funds Rate plus 50 basis points. The line of
credit requires the Company to maintain certain minimum finan-
cial ratios, including a fixed charge coverage ratio, as well as other
restrictive covenants. As of December 31, 2000, up to
$117,276,000 of the credit facility remained available for borrow-
ings (including a reduction of $2,724,000 for outstanding letters of
credit), subject to meeting certain availability requirements under
a borrowing base formula and other limitations.
In December 1998, Callaway Golf Ball Company, then a wholly-
owned subsidiary of the Company, entered into a master lease
agreement for the acquisition and lease of up to $56,000,000 of
machinery and equipment. By December 31, 1999, the Company
had finalized its lease program and leased $50,000,000 of equip-
ment pursuant to the master lease agreement. This lease program
included an interim finance agreement (the “Finance
Agreement”). The Finance Agreement provided pre-lease financing
advances for the acquisition and installation costs of the afore-
mentioned machinery and equipment. The Finance Agreement
bore interest at LIBOR plus a margin and was secured by the
underlying machinery and equipment and a corporate guarantee
from the Company. During the third and fourth quarters of 1999,
the Company converted the balance of this note payable to the
operating lease discussed above. As of December 31, 1999, no
amount was outstanding under this facility. On December 29,
2000, pursuant to an assumption agreement, the Company
assumed all of the rights, title, interest and obligations of
Callaway Golf Ball Company under the master lease agreement.
Note 5
ACCOUNTS RECEIVABLE SECURITIZATION
The Company’s wholly-owned subsidiary, Callaway Golf Sales Com-
pany, sells trade receivables on an ongoing basis to its wholly-
owned subsidiary, Golf Funding. Pursuant to an agreement effective
February 1999 with a securitization company (the “Accounts
Receivable Facility”), Golf Funding, in turn, sells such receivables to
the securitization company on an ongoing basis, which yields pro-
ceeds of up to $80.0 million at any point in time. Golf Funding’s
sole business is the purchase of trade receivables from Callaway Golf
Sales Company. Golf Funding is a separate corporate entity with its
own separate creditors, which in the event of its liquidation will be
entitled to be satisfied out of Golf Funding’s assets prior to any
value in Golf Funding becoming available to the Company. The
Accounts Receivable Facility expires in February 2004.
Under the Accounts Receivable Facility, the receivables are sold
at face value with payment of a portion of the purchase price
being deferred. During 2000 and as of December 31, 2000, no
amount was outstanding under the Accounts Receivable Facility.
Fees incurred in connection with the facility and discounts asso-
ciated with the sale of accounts receivable for years ended Decem-
ber 31, 2000 and 1999 were $303,000 and $923,000 and were
recorded as interest expense.
Note 6
DERIVATIVES AND HEDGING
During 2000, 1999 and 1998, the Company entered into forward
foreign currency exchange rate contracts to hedge payments due on
intercompany transactions by certain of its wholly-owned foreign
subsidiaries. The Company also hedged certain yen-denominated
transactions with its Japanese distributor in 1999 and 1998.
Realized and unrealized 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 foreign exchange contracts generally
do not subject the Company to risk due to exchange rate move-
ments 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, 2000,
1999 and 1998, the Company had approximately $10,457,000,
$7,117,000 and $11,543,000, respectively, of these foreign
exchange contracts outstanding. The contracts outstanding at
December 31, 2000 mature between January and March of 2001.
The Company had net realized and unrealized gains on foreign
exchange contracts of $5,299,000, $358,000 and $57,000 in 2000,
1999 and 1998, respectively.
During the fourth quarter of 2000, the Company utilized for-
ward foreign currency exchange rate contracts to hedge cash flows
associated with forecasted intercompany sales of inventory. These
forward contracts are accounted for as cash flow hedges. The
Company only hedges transactions that it deems to be more likely
than not to occur. During 2000, the Company hedged only those
transactions forecasted to occur by December 31, 2001. As of
December 31, 2000, the Company had approximately $107,779,000
of cash flow hedges outstanding. The Company assesses the effec-
tiveness of these derivatives using the spot rate. Changes in the
spot-forward differential are excluded from the test of hedge effec-
tiveness and are recorded currently in earnings as a component of
“Interest and other income, net.” Assessments of hedge effective-
ness are performed using the dollar offset method and applying a
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS