Callaway 2002 Annual Report Download - page 67

64 CALLAWAY GOLF COMPANY
Vendor Arrangements
The Company is dependent on a limited number of suppliers for
its clubheads and shafts, some of which are single-sourced. In
addition, some of the Company’s products require specifically
developed manufacturing techniques and processes which make
it difficult to identify and utilize alternative suppliers quickly. The
Company believes that suitable clubheads and shafts could be
obtained from other manufacturers in the event its regular sup-
pliers are unable to provide components. However, any sig-
nificant production delay or disruption caused by the inability of
current suppliers to deliver or the transition to other suppliers
could have a material adverse impact on the Company’s results of
operations. The Company is also single-sourced or dependent on
a limited number of suppliers for the materials it uses to make its
golf balls. Many of the materials are customized for the Company.
Any delay or interruption in such supplies could have a material
adverse impact upon the Company’s golf ball business. If the
Company did experience any such delays or interruptions, there
is no assurance that the Company would be able to find adequate
alternative suppliers at a reasonable cost or without significant
disruption to its business.
The Company has entered into long-term purchase agreements
for various key raw materials. As of December 31, 2002, the
purchase commitments covered by these agreements aggregate
approximately $3,600,000 for 2003 related to golf ball materials and
approximately $5,643,000 related to golf club materials through
December 2004.
Lease Commitments
The Company leases certain warehouse, distribution and office
facilities, as well as office equipment under operating leases.
Lease terms range from one to ten years expiring at various dates
through December 2008, with options to renew at varying terms.
Commitments for minimum lease payments under non-cancelable
operating leases as of December 31, 2002 are as follows:
(In thousands)
2003 $ 4,323
2004 2,490
2005 2,115
2006 2,086
2007 1,714
Thereafter 488
$ 13,216
allege that the Company misappropriated certain alleged trade
secrets of the Perfect Putter Co. and incorporated those purported
trade secrets in the Company’s Odyssey White Hot 2-Ball Putter.
Plaintiffs also allege that the Company made false statements and
acted inappropriately during discussions with plaintiffs. Plaintiffs
are seeking compensatory damages, exemplary damages, attorneys
fees and costs, pre- and post-judgment interest and injunctive
relief. On December 20, 2002, Callaway Golf removed the case to
the United States District Court for the Southern District of Florida,
Case No. 02-14342. The plaintiffs have moved in the federal court
for an order remanding the case to state court; that motion is pending .
No discovery has occurred.
The Company’s Korean subsidiary, Callaway Golf Korea Ltd., inad-
vertently failed to make a filing for the 1998-2000 fiscal years under
the Korean Foreign Exchange Transaction Regulation, which
requires disclosure of intercompany transfers received by Callaway
Golf Korea from the Company for warranty claims. Failure to make
this filing can result in potential criminal penalties for the responsible
employee and Callaway Golf Korea. The Company learned about the
error in the course of a routine audit by Korean customs authorities.
Upon learning of the filing requirement, the required disclosures
were made by Callaway Golf Korea for 2001 and 2002, but could not
be made retroactively for 1998-2000. The Company’s outside tax
advisor advised the Company in late October 2002 that Korean
Customs authority procedures require that the matter be referred to
Korean prosecutors for review. No action has been filed at this time.
The Company believes that if an action is brought and penalties are
assessed, they will be immaterial in amount.
The Company and its subsidiaries, incident to their business
activities, are parties to a number of legal proceedings, lawsuits
and other claims, including the matters specifically noted above.
Such matters are subject to many uncertainties and outcomes are
not predictable with assurance. Consequently, management is
unable to estimate the ultimate aggregate amount of monetary
liability, amounts which may be covered by insurance, or the
financial impact with respect to these matters as of December 31,
2002. Except as discussed above with regard to the MaxFli litigation,
management believes at this time that the final resolution of these
matters, individually and in the aggregate, will not have a material
adverse effect upon the Company’s consolidated annual results of
operations or cash flows, or financial position.