Callaway 2009 Annual Report Download - page 97

The total origination fees incurred in connection with the Line of Credit, including fees incurred in
connection with the amendments to the Line of Credit, were $2,210,000 and are being amortized into interest
expense over the remaining term of the Line of Credit agreement. Unamortized origination fees were $620,000 as
of December 31, 2009, of which $282,000 was included in other current assets and $338,000 in other long-term
assets in the accompanying consolidated condensed balance sheet.
On June 15, 2009, the Company sold 1,400,000 shares of 7.50% Series B Cumulative Perpetual Convertible
Preferred Stock, $0.01 par value (the “preferred stock”). The Company received gross proceeds of $140,000,000
and incurred costs of $6,031,000. The terms of the preferred stock provide for a liquidation preference of $100
per share and cumulative dividends from the date of original issue at a rate of 7.50% per annum (equal to an
annual rate of $7.50 per share), subject to adjustment in certain circumstances. Dividends on the preferred stock
are payable quarterly in arrears subject to declaration by the Board of Directors and compliance with the
Company’s line of credit and applicable law.
The preferred stock is convertible at any time at the holder’s option into common stock of the Company at
an initial conversion rate of 14.1844 shares of Callaway’s common stock per share of preferred stock, which is
equivalent to an initial conversion price of approximately $7.05 per share.
Note 10. Derivatives and Hedging
Foreign Currency Exchange Contracts
The Company accounts for its foreign currency exchange contracts in accordance with ASC Topic 815,
“Derivatives and Hedging” (“ASC 815”). ASC 815 requires the recognition of all derivatives as either assets or
liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of 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. In addition, it requires enhanced disclosures regarding derivative
instruments and hedging activities to better convey the purpose of derivative use in terms of the risks the
Company is intending to manage, specifically about (a) how and why the Company uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under ASC 815, and (c) how
derivative instruments and related hedged items affect the Company’s financial position, financial performance,
and cash flows.
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international subsidiaries, including certain balance
sheet exposures (payables and receivables denominated in foreign currencies). In addition, the Company is
exposed to gains and losses resulting from the translation of the operating results of the Company’s international
subsidiaries into U.S. dollars for financial reporting purposes. As part of its strategy to manage the level of
exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses derivative financial
instruments in the form of foreign currency forward contracts and put and call option contracts (“foreign
currency exchange contracts”) to hedge transactions that are denominated primarily in British Pounds, Euros,
Japanese Yen, Canadian Dollars, Australian Dollars and Korean Won. Foreign currency exchange contracts 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 currency exchange contracts
for speculative purposes. Foreign currency exchange contracts usually mature within twelve months from their
inception.
During the years ended December 31, 2009, 2008 and 2007, the Company did not designate any foreign
currency exchange contracts as derivatives that qualify for hedge accounting under ASC 815. At December 31,
2009, 2008 and 2007, the notional amounts of the Company’s foreign currency exchange contracts used to hedge
the exposures discussed above were approximately $101,723,000, $23,742,000 and $31,095,000, respectively.
The Company estimates the fair values of foreign currency exchange contracts based on pricing models using
current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value
recorded in the statement of operations.
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