Callaway 2007 Annual Report Download - page 84

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the Company acquired Preferred Shares of GEI for approximately $10,000,000. 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 investment balance in other long-
term assets in the accompanying consolidated condensed balance sheet as of December 31, 2007 and 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 used or offered for use at TopGolf facilities at prices no less than those paid
by the Company’s customers, preferred retail positioning in the TopGolf retail stores, access to consumer
information obtained by TopGolf, and other rights incidental to those listed.
In August 2007, the Company and other GEI shareholders entered into a loan agreement with GEI to provide
funding to GEI for certain capital projects as well as operational needs. In December 2007, the Company and other
GEI shareholders entered into a second loan agreement with GEI to supplement GEI’s cash flows from operations
as a result of the seasonal fluctuations of the business. Both loan agreements extend to all shareholders of GEI,
whereby each shareholder may participate by funding up to an amount agreed upon by GEI. As of December 31,
2007, the Company funded a combined total of $3,698,000 under both loan agreements, which includes accrued
interest. The loan agreements provide for the option, at the Company’s discretion, to convert up to 100 percent of
the amount drawn by GEI, including accrued interest, into convertible preferred shares. In connection with the
loans, the Company has received underwriting fees and will receive annual interest at market rates on loaned
amounts. The Company is conditionally committed to fund an additional $1,500,000 under the second loan
agreement during 2008 if called upon by GEI and if not otherwise funded by other shareholders.
In February 2008, the Company and another GEI shareholder entered into an arrangement to provide
collateral in the form of a letter of credit in the amount of $8,000,000 for a loan that was issued to a subsidiary of
GEI. The Company is currently responsible for $5,500,000 of the total guaranteed amount. This letter of credit
will expire one year from the date of issuance. In connection with the letter of credit, the Company received
underwriting fees and warrants to purchase GEI’s preferred stock, at a discounted price, at a future date.
The Company currently has no intention of exercising the warrants in connection with the letter of credit as
well as converting the amount funded to GEI into preferred shares.
Investment in Qingdao Suntech Sporting Goods Limited Company
In October 2006, the Company entered into a Golf Ball Manufacturing and Supply Agreement with Qingdao
Suntech Sporting Goods Limited Company (“Suntech”), where Suntech manufactures and supplies certain golf
balls solely for and to the Company. Suntech is a wholly owned subsidiary of Suntech Mauritius Limited
Company (“Mauritius”). In connection with the agreement, the Company provides Suntech with golf ball raw
materials, packing materials, molds, tooling, as well as manufacturing equipment in order to carry out the
manufacturing and supply obligations set forth in the agreement. Suntech provides 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 has in the Suntech operations, the Company is
required to consolidate the financial results of Suntech in its consolidated condensed financial statements as of
December 31, 2007 and 2006, in accordance with the provisions of FASB Interpretation No. 46, “Consolidation
of Variable Interest Entities.”
In addition, the Company entered into a loan agreement which provides that the Company will make certain
loans to Mauritius to provide working capital for Suntech. As of December 31, 2007, the Company has loaned
Mauritius a total of $3,200,000 and has completed its obligations under the loan agreement.
Note 4. Restructuring and Integration Initiatives
In September 2005, the Company began the implementation of several company-wide restructuring
initiatives designed to improve the Company’s business processes and reduce the Company’s overall expenses
(the “2005 Restructuring Initiatives”). The 2005 Restructuring Initiatives include, among other things, the
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