Callaway 2011 Annual Report Download - page 26

The Company’s obligations and certain financial covenants contained under the existing credit facility expose
it to risks that could adversely affect its business, operating results and financial condition.
The Company’s primary credit facility is comprised of a $230.0 million secured asset-based revolving credit
facility (as amended, the “ABL Facility”), comprised of a $158.3 million U.S. facility, a $31.7 million Canadian
facility and a $40.0 million United Kingdom facility, in each case subject to borrowing base availability under
the applicable facility. Borrowing under the U.K. facility will be permitted upon satisfaction of customary
conditions relating to delivery of U.K. collateral security documents. The amounts outstanding under the ABL
Facility are secured by certain assets, including inventory and accounts receivable, of the Company’s U.S.,
Canadian and U.K. legal entities. The Company’s borrowing is limited by the “availability ratio,” which is
expressed as a percentage, of (a) the average daily availability under the ABL Facility to (b) the sum of the
Canadian, the U.K. and the U.S. borrowing bases, as adjusted. All applicable margins will be permanently
reduced by 0.25% if EBITDA, as defined in the ABL Facility, meets or exceeds $25.0 million over any trailing
twelve-month period, and will be permanently reduced by an additional 0.25% if EBITDA meets or exceeds
$50.0 million over any trailing twelve-month period.
The ABL Facility includes certain restrictions including, among other things, restrictions on the incurrence
of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions
and affiliate transactions. Additionally, the Company will be subject to compliance with a fixed charge coverage
ratio covenant during, and continuing 30 days after, any period in which the Company’s borrowing base
availability falls below $25.0 million. If the Company experiences a decline in revenues or adjusted EBITDA, the
Company may have difficulty paying interest and principal amounts due on our ABL Facility or other
indebtedness and meeting certain of the financial covenants contained in the ABL Facility. If the Company is
unable to make required payments under the ABL Facility, or if the Company fails to comply with the various
covenants and other requirements of the ABL Facility or other indebtedness, the Company would be in default
thereunder, which would permit the holders of the indebtedness to accelerate the maturity thereof. Any default
under the ABL Facility or other indebtedness could have a significant adverse effect on the Company’s liquidity,
business, operating results and financial condition and ability to make any dividend or other payments on the
Company’s capital stock.
If the Company is unable to successfully manage the frequent introduction of new products that satisfy
changing consumer preferences, it could adversely impact its financial performance and prospects for future
growth.
The Company’s main products, like those of its competitors, generally have life cycles of two years or less,
with sales occurring at a much higher rate in the first year than in the second. Factors driving these short product
life cycles include the rapid introduction of competitive products and quickly changing consumer preferences. In
this marketplace, a substantial portion of the Company’s annual revenues is generated each year by products that
are in their first year of life.
These marketplace conditions raise a number of issues that the Company must successfully manage. For
example, the Company must properly anticipate consumer preferences and design products that meet those
preferences while also complying with significant restrictions imposed by the Rules of Golf (see further
discussion of the Rules of Golf below) or its new products will not achieve sufficient market success to
compensate for the usual decline in sales experienced by products already in the market. Second, the Company’s
research and development and supply chain groups face constant pressures to design, develop, source and supply
new products that perform better than their predecessors—many of which incorporate new or otherwise untested
technology, suppliers or inputs. Third, for new products to generate equivalent or greater revenues than their
predecessors, they must either maintain the same or higher sales levels with the same or higher pricing, or exceed
the performance of their predecessors in one or both of those areas. Fourth, the relatively short window of
opportunity for launching and selling new products requires great precision in forecasting demand and assuring
that supplies are ready and delivered during the critical selling periods. Finally, the rapid changeover in products
creates a need to monitor and manage the closeout of older products both at retail and in the Company’s own
12