Callaway 2001 Annual Report Download - page 58

Callaway Golf Company
56
(in thousands)
Long-Lived
Sales Assets
2001
United States $ 444,091 $ 234,281
Japan 130,706 3,415
Europe 118,417 13,261
Rest of Asia 63,928 729
Other foreign countries 59,021 2,877
$ 816,163 $ 254,563
2000
United States $ 451,264 $ 228,920
Japan 122,003 3,229
Europe 125,511 11,229
Rest of Asia 82,371 994
Other foreign countries 56,478 3,164
$ 837,627 $ 247,536
1999
United States $ 418,397 $ 241,241
Japan 55,927 2,634
Europe 115,673 14,027
Rest of Asia 73,121 974
Other foreign countries 55,920 3,481
$ 719,038 $ 262,357
The Company, through a distribution agreement, had appointed Sumitomo as
the sole distributor of Callaway Golf clubs in Japan. The distribution agree-
ment, which began in February 1993 and ended on December 31, 1999,
required Sumitomo to purchase specified minimum quantities. In 1999, sales
to Sumitomo accounted for 7% of the Company’s net sales. In the fourth quar-
ter of 1999, the Company successfully completed negotiations with Sumitomo
to provide a transition of its business. As a result of this transition agreement,
the Company purchased all undamaged, unopened inventory products in the
possession of the distributor and paid a transition fee to the distributor. The
Company recorded a net charge of $8,600,000 in the fourth quarter of 1999 for
transition expenses, excess and obsolete inventory purchased, and foreign cur-
rency transaction losses. The transition expenses, excess and obsolete invento-
ry charge, and foreign currency transaction losses were included in income
from operations, gross profits, and other income, respectively. The Company
also purchased saleable products and accordingly increased its inventory bal-
ance by $3,600,000. Odyssey brand products are sold through the Company’s
wholly-owned Japanese subsidiary, Callaway Golf K.K., and beginning January
1, 2000, Callaway Golf brand products were sold through this subsidiary.
NOTE 15
Licensing Arrangements
In 2001, the Company and Nordstrom, Inc. mutually terminated their prior
licensing arrangement, which included men’s and women’s golf apparel, men’s
footwear and sun and skin care products. Also in 2001, the Company entered
into an exclusive licensing arrangement with Ashworth, Inc. for the creation
of a complete line of men’s and women’s apparel for distribution in the United
States, Canada, Europe, Australia, New Zealand and South Africa. In addi-
tion, the Company also entered into a long-term licensing agreement with
Sanei International Co., Ltd. to create and sell Callaway Golf apparel in Japan.
The Company’s golf apparel products will be available at retail beginning in
2002. The first full year for which the Company will receive royalty revenue
under these licensing arrangements is 2003.
NOTE 16
Transactions with Related Parties
A director of the Company is also a senior managing director of an invest-
ment bank which performed services for the Company. Investment banking
fees incurred with this investment bank totaled $557,000 in 2001 and no fees
were paid in 2000 and 1999. Another director of the Company is also an advi-
sory partner of a law firm which performs legal services for the Company.
Legal fees incurred with this law firm totaled $351,000, $469,000 and
$1,063,000 in 2001, 2000, and 1999, respectively.
The Callaway Golf Company Foundation (the “Foundation”) oversees and
administers charitable giving for the Company and makes grants to carefully
selected organizations. Directors and executive officers of the Company also
serve as directors of the Foundation and the Company’s employees provide
accounting and administrative services for the Foundation. In 2001, the
Company recognized a charitable contribution expense of $1,000,000 as a result
of its unconditional promise to contribute such amount to the Foundation. As
of December 31, 2001, the Company had paid $584,000 of the contribution.
The remaining $416,000 was to be paid in 2002. In 2000 and 1999, the
Company donated $288,000 and $232,000, respectively, to the Foundation.
During 1998, the Company entered into an agreement with Callaway Editions,
Inc. to form CGMV, a limited liability company that was owned 80% by the
Company and 20% by Callaway Editions, Inc. (“Callaway Editions”). Callaway
Editions is a publishing and media company which was owned 9% by Ely
Callaway, Chairman, President and Chief Executive Officer of the Company,
and 81% by his son, Nicholas Callaway. During 1999, in connection with the
termination of its relationship with CGMV, the Company forgave the existing
loan balance from CGMV of approximately $2,142,000, sold its interest to
Callaway Editions for a nominal amount and paid $1,000,000 as consideration
for release from its obligation to loan CGMV up to $20,000,000. These trans-
actions did not result in a charge in 1999, as they were adequately accrued in the
1998 restructuring reserve (Note 12).
In December 1998, the Company purchased the remaining 20% interest in
Callaway Golf Trading GmbH, the Company’s former German distributor,
for $6,766,000. The purchase price was in the form of a note payable bearing
interest at 7%, due in June 1999 to the seller, who was then an officer of a
wholly-owned subsidiary of the Company. The note payable was included in
accounts payable and accrued expenses at December 31, 1998 and was paid
in February 1999.
NOTE 17
Subsequent Event
In December 1998, the Company entered into a master lease agreement for
the acquisition and lease of machinery and equipment utilized in the
Company’s golf ball operations. By December 31, 1999, the Company had
finalized its lease program and leased $50,000,000 of equipment under the
operating lease. On February 11, 2002, pursuant to the master lease agree-
ment, the Company notified the lessor of its election to purchase the leased
equipment in August 2002 for approximately $44,834,000 plus the payment
of approximately $5,200,000 of lease termination fees.