Consider the following notes from the annual report of Jocko Enterprises. Interpret any unusual terms. How are lines of credit and long-term debt used by Jocko’s managers? Explain how these notes indicate restrictions on managerial decisions. Alternatively, how do such liabilities create flexibility for managers?

Note 7—Line of Credit (Partial)

To be able to draw under the line, or if borrowings are outstanding, the agreement with the bank requires Jocko to maintain certain minimum levels of cash, cash equivalents, and/or certain marketable securities, working capital, and net worth. As of June 30, 1999, Jocko was in compliance with all the requirements. The agreement also provides that, except for borrowings represented by the 8.75% Convertible Subordinated Debentures due May 14, 2014 (the “debentures,” see Note 8), additional institutional borrowings cannot exceed $2,000,000 and seller or assumed financing of future acquisitions, if any, cannot exceed $5,000,000.

Note 8—Long-Term Debt (Partial)

The debentures were issued under an indenture containing a number of restrictive covenants. These include restrictions on mergers and sales of assets and the creation of liens on assets; limitations on payments of cash dividends and purchases of Jocko’s common stock (see Note 9); and the use of the debenture proceeds by Jocko and its subsidiaries, which are reserved for the acquisition of other businesses, and, pending such acquisition, certain short-term investments.