Callaway 2002 Annual Report Download - page 24

CALLAWAY GOLF COMPANY 21
manufacturing equipment during the third quarter. Excluding
the golf ball equipment purchase, the Company would have
been in compliance with the fixed charge coverage ratio at
September 30, 2002. At December 31, 2002, the Company
achieved a fixed charge coverage ratio in excess of the minimum
requirements prescribed by the credit facilities. In February
2003, the Amended Credit Agreement was amended to exclude
the golf ball equipment purchase from the calculation of the fixed
charge coverage ratio and the Company obtained a waiver for
prior non-compliance. Both of the credit facilities were scheduled
to expire in February 2004. The Company therefore began
reviewing what type of back-up or other financing arrangements
it would need upon expiration or termination of these facilities.
As part of this review, the Company determined that it had no
current or expected need for the Accounts Receivable Facility
and therefore in February 2003 terminated the Accounts
Receivable Facility. The Company expects to obtain a new credit
facility to provide an additional source of liquidity prior to the
expiration of the Amended Credit Agreement.
In August 2001, the Company announced that its Board of
Directors authorized it to repurchase shares of its Common Stock
in the open market or in private transactions, subject to the
Company’s assessment of market conditions and buying
opportunities from time to time, up to a maximum cost to the
Company of $100.0 million. The Company began the repurchase
program in August 2001 and during the second quarter of 2002
completed the program which resulted in the repurchase of 5.8
million shares of the Company’s Common Stock at an average
cost of $17.11 per share for a total of $100.0 million. In May 2002,
the Company announced that its Board of Directors authorized it
to repurchase additional shares of its Common Stock in the open
market or in private transactions, subject to the Company’s
assessment of market conditions and buying opportunities from
time to time, up to a maximum cost to the Company of $50.0
million. Under this authorization, the Company has spent $31.0
million to repurchase 2.0 million shares of its Common Stock at
an average cost of $15.75 per share through December 31, 2002.
During the year ended December 31, 2002, the Company spent
a total of $46.5 million to repurchase 2.8 million shares under the
August 2001 and May 2002 combined authorizations at an average
cost of $16.40 per share. As of December 31, 2002, the Company
had $19.0 million of remaining authority under the May 2002
stock repurchase authorization.
Pay m ents Due By Period
Less than After
(In millions) Total 1 Year 1-3 Years 4-5 Years 5 Years
Operating leases(1) $ 13.2 $ 4.3 $ 4.6 $ 3.8 $ 0.5
Unconditional purchase obligations(2) 9.2 3.6 5.6 — —
Deferred compensation(3) 7.4 1.0 1.4 0.8 4.2
Long-term debt(4) 3.2 3.2 — — —
Total(5) $ 33.0 $ 12.1 $ 11.6 $ 4.6 $ 4.7
(1) The Company leases certain warehouse, distribution and office facilities as well as office equipment under operating leases. The amount presented in the table represents commitments for mini-
mum lease payments under non-cancelable operating leases.
(2) The amounts indicated in this line item reflect long-term purchase agreements for various key raw materials. As of December 31, 2002, the purchase commitments covered by these agreements aggre-
gate approximately $3.6 million for 2003 related to golf ball materials and approximately $5.6 million related to golf club materials through December 2004. During the first two months of 2003, the Company
satisfied the remaining $5.6 million minimum purchase requirements related to golf club materials. In addition, in the normal course of operations, the Company enters into unconditional purchase obli-
gations with various vendors and suppliers of goods and services through purchase orders or other documentation or are undocumented except for an invoice. Such obligations are generally outstand-
ing for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in the total unconditional purchase obligations presented in this line item.
(3) The Company has an unfunded, non-qualified deferred compensation plan. The plan allows officers, certain other employees and directors of the Company to defer all or part of their compensation, to
be paid to the participants or their designated beneficiaries after retirement, death or separation from the Company. To support the deferred compensation plan, the Company has elected to purchase
Company-owned life insurance. The cash surrender value of the Company-owned insurance related to deferred compensation is included in other assets and was $9.1 million at December 31, 2002.
(4) In April 2001, the Company entered into a note payable in the amount of $7.5 million as part of a licensing agreement for patent rights. The unsecured, interest-free note payable matures on
December 31, 2003 and is payable in quarterly installments.
(5) During the second quarter of 2001, the Company entered into a derivative commodity instrument to manage electricity costs in the volatile California energy market. The contract was originally
effective through May 2006. During the fourth quarter of 2001, the Company notified the energy supplier that, among other things, the energy supplier was in default of the energy supply contract
and that based upon such default, and for other reasons, the Company was terminating the energy supply contract. The Company continues to reflect the $19.9 million derivative valuation account
on its balance sheet, subject to periodic review, in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The $19.9 mil-
lion represents unrealized losses resulting from changes in the estimated fair value of the contract and does not represent contractual cash obligations. The Company believes the energy supply
contract has been terminated and, therefore, that the Company does not have any further cash obligations under the contract. Accordingly, the energy derivative valuation account is not included
in the table. There can be no assurance, however, that a party will not assert a future claim against the Company or that a bankruptcy court or arbitrator will not ultimately nullify the Company’s
termination of the contract. No provision has been made for contingencies or obligations, if any, under the contract beyond November 2001. See below “Supply of Electricity and Energy Contracts.”
The following table provides as of December 31, 2002 certain
significant cash obligations that will affect the Company’s
future liquidity: