Callaway 2009 Annual Report Download - page 92

In February 2008, the Company 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 has an
agreement with another shareholder of GEI pursuant to which such shareholder would reimburse the Company in
certain circumstances for up to $2,500,000 for amounts the Company could be required to pay under the letter of
credit. The Company extended this agreement for an additional year through April 30, 2010. In connection with
the letter of credit, the Company received underwriting fees and warrants to purchase GEI’s preferred stock at a
future date, and is entitled to receive underwriting fees of $325,000, which the Company recorded in other
income and added to the principal due from GEI.
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. 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 financial statements for the years ended
December 31, 2009, 2008 and 2007, in accordance with ASC Topic 810, “Consolidations.”
Suntech is a wholly-owned subsidiary of Suntech Mauritius Limited Company (“Mauritius”). The Company
has entered into a loan agreement with Mauritius in order to provide working capital for Suntech. In connection
with this loan agreement, the Company loaned Mauritius a total of $3,200,000 of which $2,391,000 was
outstanding as of December 31, 2009. The Company recorded the loan in other long-term assets in the
accompanying consolidated balance sheets.
Note 5. Business Acquisitions
uPlay Asset Acquisition
On December 31, 2008, the Company acquired certain assets and liabilities of uPlay, LLC (“uPlay”), a
developer and marketer of GPS devices that provide accurate on-course measurements utilizing aerial imagery of
each golf hole. The Company acquired uPlay in order to form synergies from co-branding these products with the
Callaway Golf brand, promote the global distribution of these products through the Company’s existing sales
force and create incremental new business opportunities.
The uPlay acquisition 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 was $11,377,000,
which includes cash paid of $9,880,000, transaction costs of $204,000, and assumed liabilities of $1,293,000.
The aggregate acquisition costs exceeded the estimated fair value of the net assets acquired. As a result, the
Company has recorded goodwill of $629,000, none of which is deductible for tax purposes. The Company has
recorded the fair values of uPlay’s database and technology, trademarks and trade names, and non-compete
agreements in the amounts of $7,900,000, $540,000 and $760,000, respectively, using an income valuation
approach. This valuation technique provides an estimate of the fair value of an asset based on the cash flows that
the asset can be expected to generate over its remaining useful life. These intangible assets are amortized using
the straight-line method over their estimated useful lives, which range from 4 to 8 years.
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