Callaway 2005 Annual Report Download - page 88

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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Line of Credit provides for revolving loans of up to $250.0 million, although actual borrowing
availability is effectively limited by the financial covenants contained therein. As of December 31, 2005, the
maximum amount that could be borrowed under the Line of Credit was approximately $180.0 million, none of
which was outstanding.
Under the Line of Credit, the Company is required to pay certain fees, including an unused commitment fee
of between 12.5 to 27.5 basis points per annum of the unused commitment amount, with the exact amount
determined based upon the Company’s consolidated leverage ratio and trailing four quarters earnings’ before
income taxes, depreciation and amortization (EBITDA) (each as defined in the agreement governing the Line of
Credit). Outstanding borrowings under the Line of Credit accrue interest, at the Company’s election, based upon
the Company’s consolidated leverage ratio and trailing four quarters’ EBITDA, of (i) the higher of (a) the
Federal Funds Rate plus 50.0 basis points or (b) Bank of America’s prime rate, and in either case, plus a margin
of 00.0 to 25.0 basis points or (ii) the Eurodollar Rate (as defined in the agreement governing the Line of Credit)
plus a margin of 62.5 to 150.0 basis points. The Company has agreed that repayment of amounts under the Line
of Credit will be guaranteed by certain of the Company’s domestic subsidiaries and will be secured by
substantially all of the assets of the Company and such guarantor subsidiaries. The collateral (other than 65% of
the stock of the Company’s foreign subsidiaries) could be released upon the satisfaction of certain financial
conditions.
The Line of Credit requires the Company to meet certain financial covenants, including a minimum tangible
net worth covenant and includes certain other restrictions, including restrictions limiting dividends, stock
repurchases, capital expenditures and asset sales. As of December 31, 2005, the Company was in compliance
with the covenants and other terms of the Line of Credit, as then applicable.
The total origination fees incurred in connection with the Line of Credit were $1,303,000 and are being
amortized into interest expense over the remaining term of the Line of Credit agreement. Unamortized
origination fees were $1,009,000 million as of December 31, 2005, of which $253,000 were included in prepaid
and other current assets and $756,000 in other long-term assets in the accompanying consolidated balance sheet.
In January 2006, the Company incurred additional fees of approximately $333,000 million in connection with the
Second Amendment.
Note 8. Derivatives and Hedging
The Company uses derivative financial instruments to manage its exposures to foreign exchange rates. 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 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
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