Callaway 2010 Annual Report Download - page 101

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and had $55,043,000 of cash and cash equivalents. In accordance with the Company’s business seasonality,
average outstanding borrowings will typically be higher during the first half of the year during the height of the
golf season, and lower during the second half of the year. Average outstanding borrowings during the first half of
2010 were $31,211,000 and peaked at $69,000,000. Average outstanding borrowings during the second half of
2010 were $2,679,000 and peaked at $17,000,000. As of December 31, 2010, the Company remained in
compliance with the consolidated leverage ratio as well as with the interest coverage ratio covenants. Because the
Company remained in compliance with these financial covenants, as of January 1, 2011, the Company had access
to the full $250,000,000 under the Line of Credit (subject to compliance with other terms of the Line of Credit).
In addition to these financial covenants, the Line of Credit includes certain other restrictions, including
restrictions limiting dividends, stock repurchases, capital expenditures and asset sales. As of December 31, 2010,
the Company was in compliance with these restrictions and the other terms of the Line of Credit.
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. Outstanding borrowings under the Line of
Credit accrue interest, at the Company’s election, based upon the Company’s consolidated leverage ratio, at
(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 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 $2,250,000 and are being amortized into interest
expense over the remaining term of the Line of Credit agreement. Unamortized origination fees were $338,000 as
of December 31, 2010, of which $315,000 was included in other current assets and $23,000 in other long-term
assets in the accompanying consolidated balance sheet.
Note 11. 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
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