Callaway 1999 Annual Report Download - page 25

23CALLAWAY GOLF COMPANY
that retail at a lower price than prior products may negatively
impact the Company’s revenues unless unit sales increase.
New golf club and golf ball products generally seek to
satisfy the standards established by the United States Golf
Association (“USGA”) and the Royal and Ancient Golf Club of
St. Andrews (“R&A”) because these standards are generally
followed by golfers within their respective jurisdictions. While
all of the Company’s current golf clubs and golf balls have
been found to conform to the Rules of Golf as applied in the
jurisdictions where they are sold, there is no assurance that
new designs will receive USGA and/or R&A approval, or that
existing USGA and/or R&A standards will not be altered in
ways that adversely affect the sales of the Company’s prod-
ucts. For example, on November 2, 1998, the USGA announced
the adoption of a test protocol to measure the so-called
“spring-like effect” in certain golf clubheads. The USGA has
advised the Company that none of the Company’s current
clubs sold in the U.S. are barred by this test. The R&A is con-
sidering the adoption of a similar or related test, but has not
yet done so. Both the USGA and the R&A are reviewing the cur-
rent regulations of golf, and one or both may change those
regulations in the future. Future actions by the USGA or the
R&A may impede the Company’s ability to introduce new prod-
ucts and therefore could have a material adverse effect on the
Company’s results of operations and cash flows.
The Company’s new products have tended to incorporate
significant innovations in design and manufacture, which have
often resulted in higher prices for the Company’s products rel-
ative to other products in the marketplace. For example, the
Company’s golf balls are premium golf balls and there are
many lower priced non-premium golf balls sold by others.
There can be no assurance that a significant percentage of the
public will always be willing to pay such premium prices for
golf equipment or that the Company will be able to continue to
design and manufacture premium products that achieve mar-
ket acceptance in the future.
The rapid introduction of new golf club or golf ball prod-
ucts by the Company could result in close-outs of existing
inventories at both the wholesale and retail levels. Such close-
outs can result in reduced margins on the sale of older prod-
ucts, as well as reduced sales of new products, given the avail-
ability of older products at lower prices. The Company experi-
enced some of these effects in 1999 with respect to golf clubs
and could experience similar effects in future years as the
Company from time to time introduces new products or mis-
judges demand.
The Company plans its manufacturing capacity based
upon the forecasted demand for its products. Actual demand
for such products may exceed or be less than forecasted
demand. The Company’s unique product designs often
require sophisticated manufacturing techniques, which can
limit the Company’s ability to quickly expand its manufactur-
ing capacity to meet the full demand for its products. If the
Company is unable to produce sufficient quantities of new
products in time to fulfill actual demand, especially during the
Company’s traditionally busy second and third quarters, it
could limit the Company’s sales and adversely affect its finan-
cial performance. On the other hand, the Company commits to
components and other manufacturing inputs for varying peri-
ods of time, which can limit the Company’s ability to quickly
react if actual demand is less than forecast. As in 1998, this
could result in excess inventories and related obsolescence
charges that could adversely affect the Company’s financial
performance.
Product Breakage
The Company supports all of its golf clubs with a limited two
year written warranty. Since the Company does not rely upon
traditional designs in the development of its golf clubs, its
products may be more likely to develop unanticipated prob-
lems than those of many of its competitors which use tradi-
tional designs. For example, clubs have been returned with
cracked clubheads, broken graphite shafts and loose medal-
lions. In addition, the Company’s Biggest Big Bertha®Drivers,
because of their large club head size and extra long, light-
weight graphite shafts, have experienced shaft breakage at a
rate higher than generally experienced with the Company’s
other metal woods, even though these shafts were among the
most expensive to manufacture in the industry. This product
was discontinued in 1999. While any breakage or warranty
problems are deemed significant to the Company, the inci-
dence of clubs returned as a result of cracked clubheads, bro-
ken graphite shafts, loose medallions and other product prob-
lems to date has not been material in relation to the volume of
Callaway Golf®clubs that have been sold.
The Company monitors the level and nature of any golf
club breakage and, where appropriate, seeks to incorporate
design and production changes to assure its customers of the
highest quality available in the market. Significant increases in
the incidence of breakage or other product problems may
adversely affect the Company’s sales and image with golfers.
While the Company believes that it has sufficient reserves for
warranty claims, there can be no assurance that these reserves
will be sufficient if the Company were to experience an unusu-
ally high incidence of breakage or other product problems.
Credit Risk
The Company primarily sells its products to golf equipment
retailers, wholly-owned domestic and foreign subsidiaries and
foreign distributors. The Company performs ongoing credit
evaluations of its customers’ financial condition and generally