Callaway 2003 Annual Report Download - page 61

58 CALLAWAY GOLF COMPANY
Treasury Note. The interest rate on the outstanding balance was
4.31% in 2003. In November 2003, the Company paid the loan
balance in full. The Company recorded interest expense of
$44,000 associated with the loan in 2003. Also in connection
with the Top-Flite acquisition, the Company assumed capital
lease obligations in the aggregate amount of $394,000 at
December 31, 2003, related primarily to computer and telecom-
munication systems. The lease agreements expire in 2006.
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 was
paid in full on December 31, 2003. The Company recorded
interest expense of $139,000, $326,000 and $332,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
In March 2004, as a result of the recent Top Flite acquisition and
normal seasonality of the Company’s business, the Company
obtained a commitment (subject to customary loan documen-
tation and closing conditions) for an additional $25.0 million
unsecured line of credit with Bank of America. The purpose of
this commitment is to ensure an additional source of liquidity
during the first part of the new golf season during which the
Company typically uses more cash than it generates. During the
second quarter, the Company typically begins generating cash in
excess of its cash needs. The Company expects that all amounts
borrowed under its credit facilities will be paid off by the end of
the second quarter and that the Company will thereafter
continue to generate cash for the balance of the year.
Note 8. Derivatives and Hedging
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.
Foreign Currency Exchange Contracts
The Company 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 include antic-
ipated 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 establishe d
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
con
tracts 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. The Company does not enter into
foreign exchange contracts for speculative purposes. Hedging
contracts mature within 12 months from their inception.
At December 31, 2003, 2002 and 2001, the notional amounts
of the Company’s foreign exchange contracts were approximately
$91,222,000, $134,782,000 and $156,961,000, 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. At December 31, 2003, the fair values of foreign currency-
related derivatives were recorded as current assets of $50,000
and current liabilities of $799,000. At December 31, 2002, the
fair values of foreign currency-related derivatives were recorded
as current assets of $127,000 and current liabilities of
$2,637,000.