Callaway 2007 Annual Report Download - page 53

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quarter and continues heavily into the first quarter as well as into the beginning of the second quarter in order to
meet demands during the height of the golf season. Inventory levels start to decline toward the end of the second
quarter and are at their lowest during the third quarter. The Company’s net inventory decreased $12.1 million to
$253.0 million as of December 31, 2007 compared to $265.1 million as of December 31, 2006. This decrease is
the result of the Company’s inventory reduction initiatives which included a reduction in component lead times
as well as the implementation of internal supply chain process improvements during the current year.
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. Cash flows from
operations combined with borrowings under the Company’s credit facilities are affected by the seasonal
fluctuations of the golf business as discussed above (see “Overview and Business Seasonality”). Generally, a
significant portion of cash outflows from operations are used to purchase inventory. Cash inflows from
operations generally begin to increase during the second quarter and peak during the third quarter as a result of
collections from customers. As necessary, the Company uses its credit facilities to supplement its cash inflows
from operations as well as for other financing and investing activities, including stock repurchases.
The Company’s primary line of credit is a $250.0 million line of credit with Bank of America, N.A. and
certain other lenders party to the Company’s November 5, 2004 Amended and Restated Credit Agreement.
The Line of Credit provides for revolving loans of up to $250.0 million, although actual borrowing
availability can be effectively limited by the financial covenants contained therein. As of December 31, 2007, the
maximum amount that could be borrowed under the Line of Credit was $250.0 million, of which $35.0 million
was outstanding at December 31, 2007. In addition, the Company had approximately $1.5 million outstanding at
December 31, 2007 under other credit facilities at its foreign subsidiary locations.
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, 2007, 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, including fees incurred in
connection with the amendments, were $2.1 million and are being amortized into interest expense over the
remaining term of the Line of Credit agreement. Unamortized origination fees were $1.2 million as of
December 31, 2007, of which $0.3 million was included in prepaid and other current assets and $0.9 million in
other long-term assets in the accompanying consolidated balance sheet.
Share Repurchases
In June 2006, 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, up to a maximum cost to the Company of $50.0 million, which would
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