Callaway 2006 Annual Report Download - page 83

CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
financing of $378,000, which the Company has the option to convert into additional Preferred Shares of
GEI. The Company accounts for this investment under the cost method in accordance with the provisions of APB
Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and reflected the
balance in other long-term assets in the accompanying consolidated balance sheet as of December 31, 2006.
In addition, the Company and GEI entered into a Preferred Partner Agreement under which the Company is
granted preferred signage rights, the option to supply golf balls for the TopGolf driving ranges, rights as the
preferred supplier of golf products at prices no less than those paid by the Company’s customers used or offered
for use at TopGolf facilities, preferred retail positioning in the TopGolf retail store, access to consumer
information obtained by TopGolf, and other rights incidental to those listed.
Investment in Qingdao Suntech Sporting Goods Limited Company
In October of 2006, the Company entered into a Golf Ball Manufacturing and Supply Agreement with
Qingdao Suntech Sporting Goods Limited Company (“Suntech”), where Suntech will manufacture and supply
certain golf balls solely for and to the Company. Suntech is a wholly owned subsidiary of Suntech Mauritius
Limited Company (“Mauritius”), which is jointly owned by Qindgao Sunwoo Sporting Goods Limited Company
and another third party (collectively “Sunwoo”). In connection with the agreement, the Company will provide
Suntech with the golf ball raw materials, packing materials, molds, tooling, as well as the manufacturing
equipment in order to carry out the manufacturing and supply obligations set forth in the agreement. Suntech will
provide the personnel as well as the facilities to effectively perform these manufacturing and supply obligations.
Due to the nature of the arrangement, as well as the controlling influence the Company holds over the Suntech
operations, the Company is required to consolidate the financial results of Suntech in its consolidated financial
statements as of December 31, 2006 in accordance with the provisions of FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities". The Company does not anticipate that the consolidation of
the Suntech financial results will have a material impact on its consolidated financial statements.
In addition, the Company entered into a Loan Agreement which provides that the Company will make
certain loans to Mauritius for the capitalization of the manufacturing lines operated by Suntech. As of
December 31, 2006, the Company loaned Mauritius a total of $2,000,000 and will loan another $2,000,000
during 2007.
Note 4. Business Acquisitions
Tour Golf Group Asset Acquisition
On April 25, 2006, the Company acquired certain assets of Tour Golf Group, Inc. (“TGG”). Over the last
four years, prior to the acquisition, TGG sourced, marketed and sold golf shoes bearing Callaway Golf’s
trademarks through licensing agreements. In early 2006, TGG informed the Company that it was having financial
difficulty. The Company acquired the TGG assets to ensure the continued flow of product and the fulfillment of
orders. The Company now designs and sells footwear directly.
The acquisition of certain assets from TGG was accounted for as a purchase in accordance with SFAS
No. 141, “Business Combinations.” Under SFAS No. 141, the estimated aggregate cost of the acquired assets is
$7,704,000, which includes cash paid of approximately $1,196,000, transaction costs of approximately $224,000,
assumed inventory payables of approximately $5,413,000 and forgiveness of amounts owed by TGG to the
Company of approximately $871,000. The estimated fair value of the assets acquired exceeded the estimated
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