Callaway 2006 Annual Report Download - page 51

during the fourth quarter of 2006 compared to the same quarter of the prior year. The Company’s consolidated
days sales outstanding (“DSO”) increased to 61 days as of December 2006 as compared to 59 days as of
December 2005.
The Company’s net inventory increased $23.5 million to $265.1 million at December 31, 2006 from
$241.6 million at December 31, 2005. The increase in net inventory is primarily attributable to three drivers in
the product line for 2007, two of which are premium priced. In addition, the inventory balance as of the end of
2006 includes pre-launch inventory levels of the Company’s new irons products as well as higher levels of
putters and accessories associated with 2007 product launches. As part of the Company’s gross margin
initiatives, the Company plans to review component lead times as well as its internal supply chain process which
is anticipated to result in lower inventory levels in future periods.
Liquidity and Capital Resources
Sources of Liquidity
The Company’s principal sources of liquidity are cash flows provided by operations and the Company’s
credit facilities in effect from time to time. The Company currently expects this to continue. Effective
February 15, 2007, the Company, Bank of America, N.A., and certain other lenders party to the Company’s
November 5, 2004 Amended and Restated Credit Agreement entered into a Third Amendment to the Amended
and Restated Credit Agreement (as amended, the “Line of Credit”), to provide for modification of the financial
covenants, the release of all collateral with respect to the obligations under the Line of Credit, the reduction of
commitment fee margins and interest rate margins and certain other changes favorable to the Company. The
amendment also extends the term of the Line of Credit to expire on February 15, 2012.
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, 2006 and
February 15, 2007, the maximum amount that could be borrowed under the Line of Credit was approximately
$215.9 million, of which $80.0 million was outstanding at December 31, 2006.
Under the Line of Credit, the Company is required to pay certain fees, including an unused commitment fee
of between 10.0 to 25.0 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
interest, income taxes, depreciation and amortization, as well as other non-cash expense and income items
(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, or (ii) the Eurodollar Rate (as defined in the agreement governing the Line of
Credit) plus a margin of 50.0 to 125.0 basis points.
The Line of Credit requires the Company to meet certain financial covenants and includes certain other
restrictions, including restrictions limiting dividends, stock repurchases, capital expenditures and asset sales. As
of December 31, 2006, 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 $1.6 million and are being
amortized into interest expense over the remaining term of the Line of Credit agreement. Unamortized
origination fees were $1.1 million as of December 31, 2006, of which $0.3 million were included in prepaid and
other current assets and $0.8 million in other long-term assets in the accompanying consolidated balance sheet.
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