Callaway 2004 Annual Report Download - page 43

eÅect upon the Company's ability to deliver its products to its customers. If there were any signiÑcant
interruption in such services, there is no assurance that the Company could engage alternative suppliers to
deliver its products in a timely and cost-eÇcient manner. In addition, many of the components the Company
uses to build its golf clubs, including clubheads and shafts, are shipped to the Company via air carrier and ship
services. Any signiÑcant interruption in UPS services, air carrier services or shipping services into or out of the
United States could have a material adverse eÅect upon the Company (see below ""International Risks'').
Dependence on Energy Resources
The Company's golf club and golf ball manufacturing facilities in California use, among other resources,
signiÑcant quantities of electricity to operate. In 2001, some companies in California, including the Company,
experienced periods of blackouts during which electricity was not available. If the Company were to
experience such blackouts again, there is no assurance that it would be able to obtain alternative power
supplies at reasonable prices. An interruption in the supply of electricity or a signiÑcant increase in the cost of
electricity could have a signiÑcant adverse eÅect upon the Company's results of operations.
Competition
Golf Clubs. The golf club business is highly competitive, and is served by a number of well-established
and well-Ñnanced companies with recognized brand names, as well as new companies with popular products.
New product introductions, price reductions, consignment sales, extended payment terms, ""close-outs''
(including close-outs of products that were recently commercially successful) and increased tour and
advertising spending by competitors continue to generate increased market competition. Furthermore,
continued price compression in the club industry for new clubs could have a signiÑcant adverse aÅect on the
Company's pre-owned club business as the gap between the cost of a new club and a pre-owned club lessens.
There can be no assurance that successful marketing activities, discounted pricing, consignment sales,
extended payment terms or new product introductions by competitors will not negatively impact the
Company's future sales.
Golf Balls. The golf ball business is also highly competitive and may be becoming even more
competitive. There are a number of well-established and well-Ñnanced competitors, including one competitor
with an estimated U.S. market share of approximately 50%. As competition in this business increases, many of
these competitors are increasing advertising, tour or other promotional support. This increased competition has
resulted in signiÑcant expenses for the Company in both tour and advertising support and product
development. Unless there is a change in competitive conditions, these competitive pressures and increased
costs will continue to adversely aÅect the proÑtability of the Company's golf ball business.
On a consolidated basis, no one customer that distributes the Company's golf clubs or balls in the United
States accounted for more than 4% of the Company's revenues in 2004, 2003 or 2002. On a segment basis, the
Company's golf ball customer base is much more concentrated than its golf club customer base. In 2004, the
top Ñve golf ball customers accounted for approximately 25% of the Company's total golf ball sales. A loss of
one or more of these customers could have a signiÑcant adverse eÅect upon the Company's golf ball sales.
Adverse Global Economic Conditions
The Company sells golf clubs, golf balls and golf accessories. These products are recreational in nature
and are therefore discretionary purchases for consumers. Consumers are generally more willing to make
discretionary purchases of golf products during favorable economic conditions and when consumers are feeling
conÑdent and prosperous. Adverse economic conditions in the United States or in the Company's international
markets (which represent almost half of the Company's total sales), or a decrease in prosperity among
consumers, or even a decrease in consumer conÑdence as a result of anticipated adverse economic conditions,
could cause consumers to forgo or to postpone purchasing new golf products, which could have a material
adverse eÅect upon the Company.
34