Callaway 2002 Annual Report Download - page 55

52 CALLAWAY GOLF COMPANY
Note 6. De b t
The Company has a revolving credit facility of up to $120,000,000
(the “Amended Credit Agreement”). The Amended Credit
Agreement is secured by substantially all of the assets of the
Company and expires in February 2004. The Amended Credit
Agreement bears interest at the Company’s election at (i) the
London Interbank Offering Rate (“LIBOR”) plus a margin or (ii)
the higher of the base rate on corporate loans at large U.S. money
center commercial banks (prime rate) or the Federal Funds Rate
plus 50 basis points. The Company’s right to borrow under this
facility is subject to a borrowing base formula and certain other
limitations. As of December 31, 2002, there were no borrowings
outstanding under the Amended Credit Agreement.
At December 31, 2002, in addition to the Amended Credit
Agreement, the Company also had an accounts receivable
securitization facility (the “Accounts Receivable Facility”).
Under this facility the Company could sell its accounts receivable
through its subsidiary (Golf Funding) to a securitization company
on an ongoing basis, which could yield proceeds of up to
$80,000,000, subject to meeting certain availability require-
ments under a borrowing base formula and other limitations. As
of December 31, 2002, no amount was outstanding under the
Accounts Receivable Facility. In February 2003, the Company
terminated this facility.
Fees incurred in connection with these facilities are recorded in
interest expense. At the time the Company entered into these
facilities, the Company paid certain fees, including an origination
fee, which are amortized over the five year term of the facilities.
The amortization of these fees is approximately $556,000 per
year. The Company also paid unused facility fees for each of the
facilities in the amount of approximately $300,000 per year.
Both the Amended Credit Agreement and the Accounts
Receivable Facility include certain restrictions, including
restrictions on the amount of dividends the Company can pay
and the amount of its own stock the Company can repurchase.
These facilities also required the Company to maintain certain
minimum financial ratios, including a fixed charge coverage
ratio. At September 30, 2002, the Company was not in compliance
with the fixed charge coverage ratio. The noncompliance with
this ratio resulted from the Company’s purchase of its previously
leased golf ball 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 amend-
ed to exclude the golf ball equipment purchase from the calcu-
lation 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 would not need the Accounts
Receivable Facility and therefore in February 2003 terminated
the Accounts Receivable Facility.
In April 2001, the Company entered into a note payable in the
amount of $7,500,000 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. The
total amount payable in 2003 is $3,300,000. The present value of
the note payable at issuance totaled $6,702,000 using an imputed
interest rate of approximately 7%. The Company recorded interest
expense of $326,000 and $332,000 for the years ended
December 31, 2002 and 2001, respectively.
Note 7. De riv a t iv es an d He dg in g
The Company uses derivative financial instruments to manage
its exposures to foreign exchange rates. The Company also
utilized a derivative commodity instrument to manage its
exposure to electricity rates in the volatile California energy
market during the period of June 2001 through November 2001.
The derivative instruments are accounted for pursuant to SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended by SFAS No. 138, “Accounting for
Certain Derivative Instruments and Certain Hedging
Activities.” 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.