Callaway 1999 Annual Report Download - page 23

21CALLAWAY GOLF COMPANY
CERTAIN FACTORS AFFECTING CALLAWAY GOLF
COMPANY
Restructuring
During 1999, as planned, the Company completed the restruc-
turing of its operations that it announced during the fourth
quarter of 1998. See “Restructuring” under “Results of
Operations” discussed above. Although the Company was
pleased with the restructuring results in 1999, there can be no
assurance that the Company will continue to realize the bene-
fits of the restructuring.
Sales
Golf Clubs. The Company previously reported that it believed
that the dollar volume of the premium golf club market had
been declining in certain major markets, including the United
States. Although the Company believes that market conditions
may have stabilized, there is no assurance that the overall dol-
lar volume of the premium golf club market in the U.S. will
grow significantly, or that it will not decline, in the near future.
During 1999, the Company’s United States revenues
decreased 5% while international revenues increased 16%
compared to 1998. The Company believes that this decrease in
United States revenue was due in part to softness in the
United States market, lower revenue per club from sales of golf
equipment at low or close-out prices, and declines in iron and
putter sales due to the maturity of those product lines. The
Company believes that the increase in international revenue is
largely attributable to a significant increase in revenue from
sales in Korea as a result of the economic recovery of the
Korean market and the introduction of higher margin products
in Korea in 1999. The Company does not expect that revenue
in Korea will continue to increase at a rate comparable to 1999.
The Company further believes that some portion of sales to
international customers recorded in 1999 as direct interna-
tional sales may have formerly been made to the same inter-
national customers indirectly through the United States distri-
bution channel. See also “Certain Factors Affecting Callaway
Golf Company – Gray Market Distribution.”
The Company’s brands remained number one in the U.S.
and the worldwide market for woods, irons and putters in
1999. See also “Certain Factors Affecting Callaway Golf
Company – Competition.”
Sales of the Company’s Great Big Bertha®Hawk Eye®
Titanium Metal Woods, Big Bertha®Steelhead™Metal
Woods and Big Bertha®X-12®Irons were strong in 1999.
Hawk Eye®Tungsten Injected™Titanium Irons were intro-
duced in September 1999, and Big Bertha®Steelhead Plus™
Drivers and Fairway Woods, Big Bertha®Steelhead™X-14™
Irons and Odyssey®White Hot™Putters were released in
January 2000. The initial acceptance of these products has
also been strong to date. No assurances can be given, how-
ever, that the demand for these products or the Company’s
other existing products, or the introduction of new products,
will permit the Company to experience growth in sales, or
maintain historical levels of sales, in the future.
The Company formerly reported that golf club sales to
Japan might be lower overall for 1999 as compared to 1998 as
the Company’s distributor, Sumitomo Rubber Industries, Ltd.
(“Sumitomo”), prepared for the transition of responsibility from
it to the Company’s wholly-owned Japanese subsidiary,
Callaway Golf Kabushiki Kaisha (“Callaway Golf K. K.”), former-
ly named ERC International Company. Although the Company
subsequently reported that sales were not lower through the
first nine months of 1999, sales in Japan for all of 1999 were
down 9% compared with 1998, with the reduction largely
because net purchases by Sumitomo, as expected, declined in
anticipation of the transition. In 1999, 1998 and 1997, sales to
Sumitomo accounted for 7%, 8% and 10%, respectively, of the
Company’s total net sales. The Sumitomo distribution agree-
ment required that Sumitomo purchase specific minimum
quantities from the Company. As a direct distributor, the
Company will not have the benefit of these guaranteed mini-
mum purchases going forward. Furthermore, there is no assur-
ance that the Company will be able to transcend the cultural
and other barriers to successful distribution in Japan or that its
sales in Japan will be comparable to or exceed its prior sales to
Sumitomo. There also will be a delay in the recording of rev-
enues for sales in Japan as compared to previous years because
revenue will now be recorded upon sale to retailers and not
upon sale to a distributor. See also “Certain Factors Affecting
Callaway Golf Company – International Distribution.”
Golf Balls. In 1996, the Company formed Callaway Golf Ball
Company, a wholly-owned subsidiary of the Company, for the
purpose of designing, manufacturing and selling golf balls.
The Company had previously licensed the manufacture and
distribution of a golf ball in Japan and Korea. The Company
also had distributed a golf ball under the trademark “Bobby
Jones®.” These previous golf ball ventures were introduced
primarily as promotional efforts and were not commercially
successful.
In February 2000, the Company released its new Rule 35™
Golf Balls. These golf balls are the product of more than three
years of research and development and are manufactured in a
new facility built by the Company for that purpose. To date, the
Company’s investment in its golf ball business has exceeded
$170 million. The development of the Company’s golf ball
business, by plan, has had a significant negative impact on
the Company’s cash flows, financial position and results of