Callaway 1997 Annual Report Download - page 10

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rights, or it must obtain licenses to use them lawfully. If any
new golf ball product was found to infringe on protected
technology, the Company could incur substantial costs to
redesign its golf ball product or to defend legal actions.
Despite its efforts to avoid such infringements, there can be
no assurance that Callaway Golf Ball Company will not
infringe on the patents or other intellectual pro p e rty rights of
third parties in its development efforts, or that it will be able
to obtain licenses to use any such rights, if necessary.
“ Gray Ma rk e t” Di s t ri b u t i o n
Some quantities of the Company’s products find their way to
u n a p p roved outlets or distribution channels. This “gray mark e t”
in the Company’s products can undermine authorized re t a i l e r s
and distributors who promote and supportthe Company’s
p roducts, and can injure the Company’s imagein the minds of
its customers and consumers. On the other hand, stopping
such commerce could result in a potential d e c rease in sales to
those customers who are selling CallawayGolf products
to unauthorized distributors and/or an incre a s ein sales
returns over historical levels. While the Company has taken
some lawful steps to limit commerce in its pro d u c t sin the
“gray market” in both domestic and international m a rkets, it
has not stopped such commerce. The Company’sefforts to
address gray market issues could have an adverse impact on
the Company’s sales and financial performance.
Professional En d o r s e m e n t s
The Company also establishes relationships with pro f e s s i o n a l
golfers in order to promote the Callaway Golf brand among
both professional and amateur golfers. The Company has
e n t e red into endorsement arrangements with members of the
Senior Professional Golf Association’s To u r, the Pro f e s s i o n a l
Golf Association’s To u r, the Ladies Professional Golf Association’s
To u r, the Eu ropean Professional Golf Association’s Tour and
the Nike To u r. While most professional golfers fulfill their con-
tractual obligations, some have been known to stop using a
s p o n s o r’s products despite contractual commitments. If one or
m o re of Callaway Go l f’s professional endorsers we re to stop
using the Company’s products contrary to their endorsement
a g reements, the Company’s business could be adversely affected
in a material way by the negative publicity.
Many professional golfers throughout the world use the
C o m p a n y’s golf clubs even though they are not contractually
bound to do so.The Company has created cash “pools”t h a t
rew a rd such usage. For the last several years, the Company
has experienced an exceptional level of driver penetration on
the world’s five major professional tours, and the Company
has heavily adve rtised that fact. T h e re is no assurance that the
Company will be able to sustain this l e vel of pro f e s s i o n a l
usage. Many other companies are aggre s s i vely seeking the
patronage of these professionals, and are offering many
inducements, including specially designed products and
significant cash rew a rds. While it is not clear whether pro f e s -
sional endorsements materially contribute to retail sales, it is
possible that a decline in the level of professional usage could
have a material adverse effect on the Company’s business.
New Business Ve n t u re s
Beginning in 1995, the Company began to evaluate and
pursue new business ventures which it believes constitute
potential growth opportunities in and outside of the golf
equipment industry. The Company has invested, and expects
to continue to invest, significant capital resources in these
new ventures in the form of research and development, cap-
ital expenditures and the hiring of additional personnel.
Investments in these ventures could have a negative impact
on the Company’s future cash flows and results of o p e r a t i o n s .
T h e re can be no assurance that new ve n t u res will lead to new
p roduct offerings or otherwise increase the re venues and pro f-
its of the Company. Like all new businesses, these ventures
re q u i re significant management time, invo l ve a high degree of
risk and will present many new challenges for the Company.
T h e re can be no assurance that these activities will be success-
ful, or that the Company will re a l i ze appropriate returns on its
i n vestments in these new ve n t u res.
In t e rnational Di s t ri b u t i o n
The Company’s management believes that controlling the
distribution of its products throughout the world will be an
element in the future growth and success of the Company.
The Company is actively pursuing a reorganization of its
international operations, including the acquisition of distri-
bution rights in certain key countries in Europe and Asia.
These efforts have and will result in additional investments in
inventory, accounts receivable, corporate infrastructurea n d
facilities. The integration of foreign distributors into the
C o m p a n y’s international sales operations will re q u i re the d e d-
ication of management re s o u rces which may temporarily
detract from attention to the day-to-day business of the
Company, and also increase the Company’s exposure to fluc-
tuations in exchange rates for various foreign currencies.
International reorganization also could result in disruptions i n
the distribution of the Company’s products in some are a s .
There can be no assurance that the acquisition of some or all
of the Company’s foreign distributors will be successful, and
it is possible that an attempt to do so will adversely affect the
Company’s business.
The Company, through a distribution agre e m e n t ,
appointed Sumitomo Rubber Industries, Ltd. (“Sumitomo”)
as the sole distributor of the Company’s golf clubs in Japan.
The current distribution agreement began in February1993
and runs through December 31, 1999. The Company does
not intend to extend this agreement.